Chapter 3: Free Enterprise

The government will provide nonexcludable public goods and pay for them with taxes.

However, it does not follow that government will necessarily restrict itself to producing only nonexcludable public goods. U.S government is involved in delivering mail, building roads, collecting Social Security taxes.

Section 1

In a free enterprise economy, business firms will produce the goods that consumers want. Five major features define free enterprise: private property, choice, voluntary exchange, competition, and economic incentives.

For Whom will the Goods be produced?

In a free enterprise economy, goods are produced for those people who are willing and able to buy them.

Voluntary Exchange

In free enterprise, individuals have the right to make exchanges or trades they believe will make them better off. Individuals make themselves better off by entering into exchanges--by trading what they value less for what they value more.

An Ethical Economic System

1.Allow individuals to choose their own occupations or professions. 2.Produce goods and services preferred by both the majority and the minority. 3.Rewards or punishes producers based on how well or poorly they respond to the buying public 4.Supports the right of the individual to be free, including the freedom to acquire property, work where you choose, and start your own business.

positive externality

A beneficial side effect of an action that is felt by others.

Government as Enforcer of Contracts

A free enterprise system will be a large, thriving economy when government acts to enforce contracts and a small, sluggish economy when it does not.

entrepreneur

A person who has a special talent for searching out and taking advantage of new business opportunities. New Opportunities New Products New Processes

nonexcludable public good

A public good that individuals cannot be excluded(physically prohibited) from consuming. (national defense)

negative externality

An adverse side effect of an act that is felt by others.

contract

An agreement between two or more people to do something

Household

An economic unit of one or more that sells resources and buys goods and services.

Public Property

Any good that is owned by the government

Choice

Key element of free enterprise. Workers have the right to choose what work they will do and for whom they will work. Same do businesses.

Loss

The amount of money by which total cost exceeds total revenue. Total cost>Total revenue

Circular Flow of economic activity

The economic relationships that exist between different economic groups in an economy.

How will These Goods be produced?

The individuals who own and manage the business firms decide how goods will be produced?

ethics

The principles of conduct, such as right and wrong, morality and immorality, good and bad.

Section 4

The prospect of great profit motivates entrepreneurs to assume the risks inherent in entrepreneurship.

Competition

Under free enterprise, individuals are free to compete with others.

Profits and Losses

Whether a business is successful or not depends on whether it generates profits or losses.

on (or from) the sidelines

on (or from) the sidelines in (or from) a position where one is observing a situation but is unable or unwilling to be directly involved in it.

public good

A good of which one person's consumption does not take away from another person's consumption.

private Good

A good of which one person's consumption takes away from another person's consumption. (apple)

Who benefits?

Entrepreneurs, play an important role in society by taking risks to develop new products or new ways of doing things that benefit the public. more choices of goods

What goods will be produced?

In a free enterprise economy, business firms will produce the goods that consumers want to buy.

Resources flow toward profit

resources flow away from losses. Profit is like a big magnet: it pulls resources toward it. Loass is like a big wind: it pushes resources away.

Economic Rights and Responsibilities in a Free Enterprise Economy

1. Open Disclosure: the right to voluntary exchange comes with the responsibility of giving the other person accurate information about what is being exchanged. 2. Obeying the Law The right to private property is associated with the responsibility of using one's property only for legal purposes. 3. Being Truthful The responsibility attached to the economic right to compete in a free enterprise system is to compete in a truthful, legitimate manner.

free riders

A person who receives the benefits of a good without paying for it.

excludable public good

A public good that individuals can be excluded (physically prohibited) from consuming. (movie, lecture)

Section 3

An ethical economic system allows individuals to choose their occupations, produces goods and services preferred by buyers, rewards(or punishes) producers according to how well they respond to buyer preferences, and does not limit individual freedom in making choices.

Economic Incentives

An inventive is something that encourages or motivates a person toward action. Under free enterprise, money acts as an incentive to produce.

Private Property

Any good that is owned by an individual or a business. Under free enterprise, individuals and businesses have the right to own property, and they may own as much property as they are willing and able to purchase. #Under the right of eminent domain, the government can take ownership of the land even without the consent of the owner. But the government will compensate owners for the loss of their lands. Eminent Domain: The government can take ownership of the land even without the consent of the owner.

Laws, Institutions and Regulations

Free enterprise operates in countries, which have different systems of laws, institutions, and regulations. Legal systems and institutions can either help or hinder free enterprise.

A Snapshot of an Economy

It is customary to think of an economy as composed of business, government, and households. Businesses and households: Households sell resources to businesses, and businesses pay for those resources. Government and households: pay taxes; provides goods and services Government and businesses: pay taxes; goods and services

Economic Principles in Key Documents

Many Documents have free enterprise economic principles contained within it. Bill of Rights: "private property shall not be taken for public use, without just compensation." Declaration of Independence. The signers of the Declaration of Independence listed many complaints against the king of Great Britain for preventing the 13 colonies from trading with all parts of the world. The Constitution: "no tax or duty shall be laid on articles exported from any State." To preserve competition-an important feature of free enterprise-it was important to deny states the right to tax each other's goods.

Section 5

One of government's roles in free enterprise is to enforce contracts. A public good is a good in which one person's consumption does not take away from another person's consumption. A free enterprise economy will not produce nonexcludable public goods because no one will pay for them. Many believe that government should provide nonexcludable public goods and adjust for externalities.

Five Features of Free Enterprise

Private property, choice, voluntary exchange, competition, economic incentives

Section 2

Profit is the money left over after the costs of production are paid. Profits and losses are signals to business firms.

Profit and Loss as "Signals"

Profits and Losses are a.signals to the firms actually earning the profits or taking the losses b.signals to firms standing on the sidelines.

Profit

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. Total revenue=Price of a good*Number of units sold Total cost=Average cost of a good*Number of units sold

Three ways to reduce the negative externalities

court system, regulation, and taxation