2 CHAPTER 3: SECTION 1 Characteristics of Free Enterprise How Does Free Enterprise Answer the Three Economic Questions? In a free enterprise economy, business firms will produce the goods that consumers want to buy. For example, General Motors and Ford Motor Company decide what style and make of cars they will produce based on what they think the carbuying public wants to buy. The individuals who own and manage the business firms decide how goods will be produced.
3 In a free enterprise economy, goods are produced for people who are both willing and able to buy them. For example, a person may have $1,000 to spend on a new computer, but be unwilling to replace his or her old computer. In this case, the potential buyer is able, but not willing, and a sale will not take place.
4 Free Enterprise In a free enterprise system, individuals own most, if not all, of the resources.
5 Five Features of Free Enterprise Private property can be described as any good that is owned by an individual or a business, such as a car, a house, or a piece of machinery. Any good that is owned by the government is referred to as public property. Sometimes the government may have a need for private property. Under the right of eminent domain, the government can take ownership of private property even without the consent of the owner. In such cases, the government will compensate owners for their loss. Eminent domain has been used to obtain private land for such uses as building new schools, highways, and government buildings.
6 Freedom of Choice. Workers have the right to choose what work they want to do and whom they will work for. Businesses have the right to choose the products they will produce and offer for sale. Likewise, buyers have the right to choose the products they will buy.
7 Voluntary Exchange In free enterprise, individuals have the right to make exchanges or trades that they believe will make them better off. Trading $10 cash for a book is an example of a voluntary exchange. Competition Free enterprise also gives way to competition. Consumers are likely to benefit from competition between sellers. Workers can also benefit from competition. The competition between employers for labor services will often result in higher wages. Economics Incentives Under free enterprise, money acts as an incentive to produce. If you produce goods and services that people are willing and able to buy, you receive money in return.
8 Laws, Institutions, and Regulations A country s legal system determines, to a large degree, how free enterprise operates. Legal systems and institutions can either help or hinder free enterprise.
9 The Circular Flow The circular flow of economic activity in the U.S. economy shows the relationship among the key players in the economy. Households sells resources to businesses, and businesses pay for these resources. Businesses sell goods and services to households, and households pay for these goods and services. Households pay taxes to government, and government provides goods and services to households, such as roads, schools and national defense. Businesses pay taxes to government, and government provides goods and services to businesses.
10 The Circular Flow of Economic Activity
11 The circular diagram is useful because it helps us see how a change in one economic activity (such as paying taxes) will lead to a change somewhere else in the economy (such as the amount households spend on goods and services produced by businesses).
12 Profits and Losses CHAPTER 3: SECTION 2 Profit and Loss in Free Enterprise Profit equals total revenue (price of a good times the units of the good sold) minus total cost (average cost of a good times the number of units of the good sold). Profit is the amount of money left over after all the costs of production have been paid. Profit exists whenever total revenue is greater than total cost. A loss occurs when the total cost exceeds total revenue.
13 Profits and Losses TOTAL REVENUE= price of a good x number of units sold TOTAL COST = average cost of a good x number of units sold PROFIT = total revenue > total cost LOSS = total cost > total revenue
14 For example, suppose you sell 10 headphones at $100 each, for a total revenue of $1,000. If it costs you an average of $70 each to produce those headphones, your total cost to produce 10 headphones is $700. Do you have a profit or a loss on your sale of 10 headphones? Answer: Profit of $300
15 Profit and Loss as Signals In a free enterprise economy, some businesses are earning profits and some are taking losses. Profits and losses are 1. signals to the firms actually earning the profits or taking the losses, and 2. signals to firms standing on the sidelines A firm on the sidelines will see what product is profitable and possibly enter that market. A firm may discontinue a product that is producing losses, and reallocate its resources to a profitable product. Resources flow toward profit and away from losses.
16 CHAPTER 3: SECTION 3 The Ethics of the Free Enterprise System Ethics and Free Enterprise Ethics consists of the principles of CONDUCT, such as right and wrong, morality and immorality, and good and bad. An ethical economic system should have four characteristics. Supporters of free enterprise say that the free enterprise economic system has these characteristics. Allow individuals to CHOOSE their own occupations or professions. Produce the goods and services preferred by both the majority and the MINORITY. REWARDS (or PUNISHES) producers according to how well (or poorly) they respond to the preferences of the buying public. Provide people with numerous FREEDOMS, including the freedom to work where they want to work, the freedom to start their own businesses if they want, the freedom to acquire property, the freedom to buy and sell the goods they want to buy and sell, and even the freedom to FAIL.
17 Economic Principles in Key Documents The Bill of Rights shows a high regard for PRIVATE property. The Bill of Rights notes that private property [shall not] be taken for public use, without just COMPENSATION. The Declaration of Independence encourages free TRADE - an essential ingredient of free enterprise. The Declaration of Independence lists COMPLAINTS against the king of Great Britain, George III. One complaint is that the king prevented the 13 colonies from TRADING with all parts of the world. The Constitution preserves COMPETITION an important feature of free enterprise by denying states the right to tax each other s goods. Article 1, Section 8, of the U.S. Constitution states that no tax or duty shall be laid on articles EXPORTED from any State. To preserve competition, it was important to allow the free trade of goods ACROSS state lines.
18 Economic Rights and Responsibilities in a Free Enterprise Economy People in a free enterprise economy usually share three sets of rights and responsibilities: OPEN DISCLOSURE The right to sell an item comes with the responsibility to disclose any relevant facts about the item in question. OBEYING THE LAW One has the right to use private property as one wishes, within the limits of the law. BEING TRUTHFUL The responsibility attached to the right to compete is that one must compete in a truthful, legitimate
19 CHAPTER 3: SECTION 4 Entrepreneurs Imagine Being an Entrepreneur An entrepreneur is a person who has a special talent for searching out and taking advantage of new business opportunities. Entrepreneurs play an important role in society by taking risks to develop new products or new ways of doing things that benefit the public. Most people are not entrepreneurs; entrepreneurs are a tiny minority of the population.
20 Entrepreneurs, Profit, and Risk People will not risk their time and money to develop new products unless they can potentially earn a profit. Not all entrepreneurs are successful. However, a few end up as millionaires and even billionaires, and it is the prospect of such success that motivates entrepreneurs.
21 CHAPTER 3: SECTION 5 The Role of Government in a Free Enterprise Economy Government as Enforcer of Contracts A contract is an agreement between two or more people to do something. Government punishes people who break their contracts. In other words, the government enforces contracts. Without government to enforce contracts, the risk of going into business would be too great for many people. Could the free enterprise system function without a government to enforce contracts? Probably not as well, because the risks of going into business would be too great.
22 Government as Provider of Non-excludable Public Goods Goods are categorized as two major types: private goods and public goods. A private good is a good in which one person s consumption takes away from another person s consumption. Examples include food and gas. A public good is a good in which one person s consumption does not take away from another person s consumption. An example would be a movie in a movie theater.
23 A public good can be excludable or non-excludable. An excludable public good is a public good that individuals can be excluded (physically prohibited) from consuming. An example would be a college lecture, which is available only to enrolled students of the college. A non-excludable public good is a public good that individuals cannot be excluded from consuming. Free riders are people who receive the benefits of a good without paying for it.
24 Who will want to produce a nonexcludable public good? Economists say that in a free enterprise system, no one will want to. After all, people will not pay for something they get anyway. However, even in a free enterprise economy, people want non-excludable public goods, such as national defense or flood protection (dams). Who will produce these goods? The government will provide non-excludable public goods and pay for them with taxes. One way for people to communicate what nonexcludable public goods they want is through the voting process.
25 Externalities There are two kinds of externalities: negative and positive externalities. A negative externality is an adverse side effect of an act that is felt by others. A positive externality is a beneficial side effect of an action that is felt by others.
26 Some people argue that education generates positive externalities. What you learn at school will not only help you earn a living, but also help you become a better citizen and a more informed voter. Following that argument, if the public benefits from your education and the education of others, then the public should pay for that education. Some people argue that government should pay for all activities that generate positive externalities for society.
27 When it comes to negative externalities, some might say that the role of government is to reduce the negative externalities. Government can reduce the negative externalities through the following: the court system, regulation, and taxation. If you have a complaint against a negative externality, the courts are available to hear your case and find a resolution. The government creates regulations, such as speed limits and pollution standards, to deal with negative externalities.
ACTIVITY 1.1 Directions: Read Part A and Part B. Part C. Use information from Part A and B to complete the grid in Part A. Characteristics of a Market Economy 1. Private Property Labor resources, natural
CHAPTER 2: THE MARKET SYSTEM AND THE CIRCULAR FLOW Introduction The problem of scarcity forces societies to make choices about what to produce, how to produce those goods, and who will receive the goods
JA BizTown Vocabulary Unit 1 Community and Economy Citizen A member of a town, city, country, state or country. Community A place where people live, work, trade and share. Trade Exchange of goods and services,
Lesson 0 - The Circular Flow of Economic Activity INTRODUCTION Economics The circular flow of economic activity is a simplified macroeconomic model of the basic economic relationships in a market economy.
Standard 1: Scarcity Productive resources are limited. Therefore, people can not have all the goods and services they want; as a result, they must choose some things and give up others. Section 1 Savings
Microeconomics Topic 9: Explain externalities and public goods and how they affect efficiency of market outcomes. Reference: Gregory Mankiw s Principles of Microeconomics, 2 nd edition, Chapters 10 and
Chapter 2 Economic Resources and Systems Section 2.2 Economic Systems Click here to advance to the next slide. Read to Learn Describe the three basic economic questions each country must answer to make
Chapter 2 Economic Systems BIG IDEAS = Responsibility, Choices, Changes, and Relationships Essential Questions: How do societies provide for their people in a traditional, command and market economy? How
Unit 1: Fundamental Concepts 1-2 Economic Systems 1 Ch. 2 Types of Economic Systems An economic system is the way in which a society uses its resources to satisfy its people s unlimited wants. An economic
CHAPTER 21 Market Failure versus Government Failure The business of government is to keep the government out of business that is unless business needs government aid. Will Rogers McGraw-Hill/Irwin Copyright
Pre-Test Chapter 2 ed17 1. "Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a
The Four Conditions for Perfect Competition Perfect competition is a market structure in which a large number of firms all produce the same product. 1. Many Buyers and Sellers There are many participants
SECTION 3 Market Economies OBJECTIVES KEY TERMS TAKING NOTES In Section 3, you will describe what a market is and how it works identify the main features of a market economy analyze how the circular flow
WorldView Software Economics South Carolina Correlation Document 76 North Broadway, Suite 2002, Hicksville, NY 11801 516-681-1773 firstname.lastname@example.org South Carolina Social Studies Economics WorldView
PUBLIC GOODS AND EXTERNALITIES I. PRIVATE GOODS a. PRIVATE GOODS are produced through the competitive market system. They encompass the full range of goods available to the consumer in stores and shops
1. Given that resources are scarce: A) A "free lunch" is possible but only for a limited number of people B) Poor countries must make choices but rich countries do not have to make choices C) Opportunity
Common Sense Economics Part II. Seven Major Sources of Economic Progress Practice Test Multiple Choice Questions 1. Why is private ownership an important source of economic prosperity? a. It eliminates
Exam 1 Review 1. When a firm sells a product out of inventory, GDP: A) increases. B) decreases. C) is not changed. D) increases or decreases, depending on the year the product was produced. 2. An economy's
Review Question - Chapter 7 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) International trade arises from A) the advantage of execution. B) absolute
Instructions: This is the on-line Multiple Choice Quiz for Chapter 4. Please do the following. Step I - Go to the special codes section on your score sheet Write your section number (1, or 4, or 5) under
Perfect Competition What conditions must exist for perfect competition? What are barriers to entry and how do they affect the marketplace? What are prices and output like in a perfectly competitive market?
I. CE.11a A. People make choices about how to use limited resources, decide the ownership of resources, and structure markets for the distribution of goods and services. B. Scarcity there is never enough
Review for the Midterm Exam. 1. Chapter 1 The principles of decision making are: o People face tradeoffs. o The cost of any action is measured in terms of foregone opportunities. o Rational people make
DEFINITION OF A FREE (LABOR) MARKET A market in which buyers and sellers are at liberty to trade without restriction as to prices or quantities, and in which there is no compulsion to either buy or sell.
Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Introduction We have already established that taxes are one of the reasons that supply decreases. Subsidies, which could be called
AP Macroeconomics Unit 2 Lesson 1: Key Idea: The study of economics exists because of scarcity. Scarcity forces us to choose between various alternatives (trade-offs). All choices have costs (opportunity
N. Gregory Mankiw Principles of Economics Chapter 10. EXTERNALITIES Solutions to Problems and Applications 1. The Club conveys a negative externality on other car owners because car thieves will not attempt
Economics EOC Quiz Answer Key Microeconomic Concepts - (SSEMI1) Flow Of Goods, (SSEMI2) Law Of Demand, (SSEMI3) Economic Behavior, (SSEMI4) Organization And Role Of Business Student Name: Teacher Name:
Measuring National Output and National Income 6 C H A P T E R O U T L I N E Gross Domestic Product Final Goods and Services Exclusion of Used Goods and Paper Transactions Exclusion of Output Produced Abroad
E201 Department Final Exam Questions, Sample Set Two Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1 Sue s opportunity cost to produce last
Topic 4: Different approaches to GDP PRINCIPLES OF MACROECONOMICS Dr. Fidel Gonzalez Department of Economics and Intl. Business Sam Houston State University Three different approaches to measure the GDP
Gruber - Public Finance, Chapter 23.2 Capital gains taxation A capital gain in a period is the change in the market value of an asset over that period. Capital gains are the form of return for investments
Review chapters 19, 20, 21,22, 23, 24, 8 Know how to compute the tax burden on consumers and on producers, given pre-tax equilibrium price and post-tax equilibrium price: Consumer tax burden equals (post-tax
Office of The Consumer Protector Hire-Purchase Agreements (Or Instalment Sale Agreements) Speak to us. Know your consumer rights Western Cape Office Of THE CONSUMER PROTECTOR Call the toll free number:
Class: Date: Economic Systems and Decision Making Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. A great variety of goods and services is
The Five Foundations of Economics What is Economics? Myth: Economics is about Money Truth: Economics is about people, and how people (individuals, firms and societies) make decisions about scarce resources.
Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.
Econ. 1A What is Economics? Economic Way of Thinking What is Economics? 1. Women & Men Nature Wants Resources Desires Goods Preferences Opportunities Choice Economics is concerned with wants and resources.
TITLE: Saving, Investing, and the Invisible Hand PRIMARY SUBJECT AREAS: High School Economics GRADE LEVELS: 9-12 OVERVIEW: This lesson explains how financial institutions in a market economy channel savings
Fact Sheet This fact sheet covers: Assets of a bankrupt Employment, contributions and income Obligations when bankrupt End of bankruptcy If you become bankrupt, a trustee is appointed to administer your
Chapter 24 Measuring the Wealth of Nations 2014 by McGraw-Hill Education 1 What will you learn in this chapter? How to calculate gross domestic product (GDP). Why each component of GDP is important. What
Name Eco200: Practice Test 1 Covering Chapters 10 through 15 1. Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution by a certain
I. Learning Objectives In this chapter students should learn: A. How to differentiate demand side market failures and supply side market failures. B. The origin of consumer surplus and producer surplus,
Page 1 Chapter 13 Controlling Market Power: Antitrust and Regulation 1)Which of the following is an example of natural monopoly? A) a market for cable TV services B) a market for breakfast cereals C) a
GEORGIA PERFORMANCE STANDARDS Microeconomics GEORGIA PERFORMANCE STANDARDS INTERNATIONAL ECONOMICS Microeconomic Concepts SSEMI1 The student will describe how households, businesses, and governments are
The Health Care Market Who are the buyers and sellers? Everyone is a potential buyer (consumer) of health care At any moment a buyer would be anybody who is ill or wanted preventive treatment such as a
Economics of Uncertainty and Information Introduction In this lecture, we will discuss briefly some of the issues that have been at the frontiers of economics. They concern decisions when there is uncertainty
Name: Date: 1. GDP is all of the following except the total: A) expenditure of everyone in the economy. B) income of everyone in the economy. C) expenditure on the economy's output of goods and services.
Code of Ethics Direct Selling Europe Table of contents Chapter I Introduction 4 1. Scope.................................................. 6 2. Aims................................................... 6
Session 8 Smith, Is There A Prima Facie Obligation to Obey the Law? Identifying the Question Not: Does the fact that some act is against the law provide us with a reason to believe (i.e. evidence) that
Financial Intermediation The last time you bought an apple at the grocery store did wonder at all who grew the apple? Probably not. You deal with the grocery store, a fruit intermediary among other things,
Stock Market Game Test A test of basic economic concepts and institutions related to saving, investing, risk, the stock market, and productivity 1. A personal investment such as purchasing stocks or corporate
Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a
Economics - Chapter 3 Notes Section 1: Forms of Business Organizations There are three main forms of business organizations in the economy today the sole proprietorship, the partnership, and the corporation.
Everyday Economics Lesson Description In this lesson, students will be introduced to entrepreneurs as a resource and explore their function in the economy. Through a series of interactives, students will
Worksheet 11.1 Circular Flow Simulation Please note this is a class activity. Why not suggest it to your teacher? Objective: To understand how productive resources, goods and services and money flow from
TEST on SOL: CE.11 Economic Concepts 40 Questions 1. Scarcity means that A. there is plenty for everyone. B. inflation is up. C. supply and demand are at market equilibrium. D. we are unable to satisfy
Miami Dade College ECO 2023 Principles of Microeconomics Summer B 2014 Practice Test #3 1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B)
Chapter 1: Economics Foundations and Models...3 Chapter 2: Choices and Trade-Offs in the Market...7 Chapter 3: Where prices come from The interaction of Demand and Supply...10 Chapter 4: Elasticity The
The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital
Introduction Secondary ticket platforms compliance review 1. A well-functioning secondary ticket market benefits fans by helping them to get tickets for events they want to see and by helping them when
Chapter 6:Economies in Transition Economic systems: is a set of institutions for allocating resources and making choices to satisfy human wants. Resource allocation is the assignment of resources to specific
Chapter 14 DEMAND AND SUPPLY IN FACTOR MARKETS Key Concepts Prices and Incomes in Competitive Factor Markets Factors of production (labor, capital, land, and entrepreneurship) are used to produce output.
Chapter 2 The price mechanism Syllabus Content B - The market system and the competitive process 40 % The price mechanism: the demand and supply model and its applications. Page 1 2.1 A market Buyers and
1 Objectives for Chapter 10 The Circular Flow Model At the end of Chapter 10, you will be able to answer the following: 1. Explain the basic circular flow model. 2. Define "consumption" and "saving" 3.
chapter 6 >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade One of the nine core principles of economics we introduced in Chapter 1 is that markets
Chapter 6 - Markets in Action - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short-run impact of the San Francisco earthquake
Academic Standards for June 1, 2009 FINAL Secondary Standards Pennsylvania Department of Education These standards are offered as a voluntary resource for Pennsylvania s schools and await action by the
Lesson 4 - Property Rights in a Market Economy INTRODUCTION Economics All market economies have several basic characteristics in common including private property, free enterprise, self-interest, competition,
Microeconomics I - Lecture #13, May 12, 2009 13 Externalities Up until now we have implicitly assumed that each agent could make consumption or production decisions without worrying about what other agents
GDP Review Questions 13. Gross Domestic Product measures the a. quantity of the goods and services produced in a given year, listed item by item, within a country. b. income of the business sector within
SOLUTIONS TO END-OF-CHAPTER EXERCISES Chapter 1 and Chapter 1 Appendix Answers to Thinking Critically Questions 1. Several factors prevent all high-paying service jobs from moving to countries like China
FRAMINGHAM STATE COLLEGE PRINCIPLES OF MICROECONOMICS PROBLEM SET NUMBER 13 My Name is? Using the material covered in CHAPTER 18. 1. On a graph for each of a, b, and c: show the effect of each of the following
This lesson plan is from the Council for Economic Education's publication: Mathematics and Economics: Grades 3-5 To purchase Mathematics and Economics: Grades 3-5, visit: http://store.councilforeconed.org/mathandecon35.html
Measuring a Nation s Income I. Review of the Definitions of Microeconomics and Macroeconomics A. Definition of microeconomics: the study of how households and firms make decisions and how they interact
MARKET Market is a place where consumers meet sellers and the trading takes place. The consumers buy products at certain price, so money is exchanged for goods and services. We distinguish types of market
GEORGIA PERFORMANCE STANDARDS International Domain [Type the author name] GEORGIA PERFORMANCE STANDARDS INTERNATIONAL ECONOMICS Fundamental Economic Concepts SSEF3 The student will explain how specialization
Economics 2106 Principles of Microeconomics Exam 2 Feb 28, 2002 Professor Robert Collins 1) The price elasticity of demand measures A) the responsiveness of quantity demanded to a change in price. B) the
CHAPTER 25 Measuring the Aggregate Economy The government is very keen on amassing statistics... They collect them, add them, raise them to the n th power, take the cube root and prepare wonderful diagrams.
Chapter 6 Supply, Demand, and Government Policies Review Questions Using supply-demand diagrams, show the difference between a non-binding price ceiling and a binding price ceiling in the wheat market.
, Spring 2008 February 21, 2008 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Midterm 1 1. What will happen to the equilibrium price of hamburgers
The Role of Government in the Economy The government provides the legal framework and services needed for the effective operation of a market economy. In the context of economic development, that mission