American Free EnterpriseCHAPTERS 3.1-3.4

A tradition of free enterprise

Currently 18 million unincorporated businesses in America, started by single entrepreneurs or small groups

Even after centuries, America is seen as the “land of opportunity,” because it allows people to be successful and contribute to the country’s overall economic prosperity.

Why is America such a success? American Free Enterprise The social and political commitment to giving people the freedom to try out

their business ideas and compete in the market

Constitutional Protections

Guarantees some rights that allow people to engage freely in business Property rights

Under Fifth Amendment, private property cannot be seized for public use without “just compensation” (applies to federal government)

Under 14th Amendment, the 5th gets applied to the states as well. These rights apply not only to individuals, but to corporations as well.

Constitutional Protections

Contracts Constitution guarantees people and businesses the right to make binding

contracts Article I, Section 10: prohibits states from passing any “Law Impairing the

Obligation of Contracts,” meaning individuals and businesses cannot use the political process to get excused from contracts.

No legislature can pass a law that changes the terms of someone’s business agreement.

Basic Principles of Free Enterprise

Key characteristics: Profit motive—the force that encourages people and organizations to

improve their material well-being In America, people are able to run their businesses in ways that will help them

earn the most profit Forces management to exercise financial discipline because it makes people

economically responsible for their own success/failure (in other words, because the government isn’t controlling businesses, individuals/corporations are)

Rewards innovation by letting companies grow, and improves productivity by allowing more efficient companies to make more money

Basic Principles of Free Enterprise

Key Characteristics (continued…don’t write this bullet down) Open Opportunity

Concept that everyone can compete in the marketplace. Allows for mobility up or down

Economic Rights Legal Equality

We allow everyone to compete in the marketplace; Maximizes a country’s use of its human capital

Private Property Rights People have the right to control their possessions as they wish.

Basic Principles of Free Enterprise

Economic Rights (don’t write this bullet down again…) Free Contract

Allows people to enter into whatever agreements they want to. Voluntary Exchange

Lets people decide what and when they want to buy and sell, rather than forcing sales at specific times or at specific prices

Competition The rivalry among sellers to attract customers while lowering costs;

This provides choice for consumers for a myriad of goods at reasonable prices

Role of the Consumer

Consumers make their desires known through their economic dealings with producers (when they buy, they signal what to produce and how much to make)

Consumers can join interest groups—private organizations that try to persuade public officials to act or vote according to the interest of the members Taxation, aid for farmers, land use, etc.

Role of the Government Ensure producers provide consumers with information about products

Public Disclosure Laws Require companies to give consumers info about their products; allows consumers to evaluate their buying options

Regulate goods and services that can affect well-being of consumers Environmental protection rules (disposing of hazardous chemicals, zoning laws, etc.)

Public Interest—the concerns of the public as a whole Cars, food, medicine, and other products that might impact the health and well-being of consumers

Sanitary conditions, safe medication, safe medical equipment, expiration dates

Negative Effects of Regulation Businesses have pointed out that government programs are costly, cut into profits, slow growth, and force

them to charge higher prices Highly regulated industries (airlines, telephone companies) felt that government rules stifled competition,

raised government spending 80s and 90s—Public pressure led to budget cuts in the area of government regulation of industry.

Promoting Stability and GrowthSECTION 2

Tracking Business Cycles

Macroeconomics Study of behavior and decision-making of entire economies Examines major trends for an economy as a whole.

Economists measure economic growth with a tool called GDP (gross domestic product) The total value of all final goods and services produced in an economy

Helps to predict the business cycle—a period of macroeconomic expansion and decline, which can last for a year or multiple years, and are major fluctuations. We are always at some point in the business cycle

Tracking Business Cycles

More about business cycles (don’t write this down) (write this down) Free enterprise systems are subject to b.c’s because

economic decisions are made by individuals acting in their own self-interest. Government attempts to keep wild swings in economic behavior from

happening B.C. impacts our lives everyday

Prices rise, but incomes don’t: ability to buy declines Not enough jobs: graduates have difficulty finding work

Promoting Economic Strength

Government focuses on three areas to provide stability: employment, growth, stable prices

Employment Most economists consider unemployment rate between 4 and 6 percent to

be healthy and desirable (in US) Last half of 20th century, ranged from 3-11 percent.

Promoting Economic Strength

Growth Desire for each generation to have a higher standard of living than the prior

generation Economy must provide additions goods and services to the next generation

This is measured by GDP

Promoting Economic Strength

Stability Gives people confidence in the economy and in our financial institutions, which

promotes freedom and growth Indicators include general price levels, health of financial institutions General price levels

Government wants to prevent sudden shifts in prices because it puts a strain on consumers, as well as producers

Healthy financial institutions Federal government monitors and regulates American banks; Hundreds of regulations, and the

power to enforce them. Protect bank deposits and pensions for retirees. Investigate fraud and manage interest rates and flow of money.

Technology and Productivity

American economy has higher GDP (and therefore standard of living) than most other economies in the world.

One way to keep growing (and shifting the PPF outward) is through work ethic—a commitment to the value of work and purposeful activity.

Another way to continue growth is through improved technology. Allows economy to produce more output from the same of smaller quantities

of inputs (resources) Allows the US economy to operate more efficiently and productively

increasing GDP and giving US businesses a competitive edge

Technology and Productivity

The Government’s Role Inventions are soul of free enterprise system

Allow us to build more, better, and faster, giving consumers choices Government provides incentives for innovation Federal agencies fund research and development projects at universities

Texas A&M and Massachusetts Institute of Technology Government has its own research institutions

NASA—not only the Space program itself, but residual projects that have ended up with commercial uses Offering inventors huge profits in the free market

U.S. patent gives inventor sole rights to their product for 20 years Copyright grants an author exclusive rights to publish and sell their creative work

Framers saw the need to create incentives for innovations. Article 1, Section 8 of the Constitution: Promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.