Chapter 3 - American Free Enterprise

Define "business cycle".

A business cycle can be broken down into 4 parts: expansion of growth, peak, contraction (recession), and trough (depression).

Explain the difference between a patent and a copyright.

A patent gives the inventor of a new product the exclusive right to produce and sell it for 20 years. A copyright grants an author exclusive rights to publish and sell his or her creative works.

Define externality.

An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.

Define free enterprise.

Free enterprise is an economic system characterized by private or corporate ownership of capital goods. In a free enterprise system, investments are determined in a free market by private decisions rather than by state control.

Identify and explain the difference between positive and negative externalities.

Positive externalities generate benefits to people who do not necessarily purchase or consume a good or service. For example, someone can purchase and restore a run-down house in the neighborhood, and all of the home-owners will benefit. Negative externalities generate unintended costs to people who do not purchase a good or service. For example, a new factory in a community may increase the costs living in the community because an increase in pollution associated with the new factory.

Define poverty threshold.

Poverty threshold is an income level below that which is needed to support families or households.

Identify the Constitutional protections that encourages free enterprise.

The 5th Amendment involves due process and the right of the government to take private property. The 14th Amendment provides the same as the 5th Amendment at the state/local level. Article 1 gives Congress the power to levy taxes. The 16th Amendment allows for a tax on income.

Define "public good".

A public good is a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers. Examples are roads and military defense.

Identify government assistance programs.

Government assistance programs include the Temporary Assistance for Needy Families, unemployment insurance, workers' compensation, Social Security, the Food Stamp, Medicare, and Medicaid.

Define GDP and explain how it is used.

Gross Domestic Product is the total value of all final goods and services produced in an economy. Economists follow the country's GDP and other key statistics to predict business cycles.

Identify the role of government in free enterprise.

In free enterprise, the government makes sure that producers provide consumers with information, imposes various restrictions, and protects consumers (i.e their health, safety, and well-being).

Identify the principles of free enterprise.

The principles of free enterprise include profit motive, open opportunity, legal equality, private property rights, free contract, voluntary exchange, and competition.