College Prep Economics Chapter 3, “American Free Enterprise”
Chapter 3, Section 1, “Benefits of Free Enterprise”
Page 55, “Assessment”
1.
Explain the importance of the following terms in the U.S. free enterprise system: (a) profit motive, (B)
voluntary exchange, (c) private property rights, and (d) competition.
The profit motive is the force that encourages people to improve their material well-being and the idea
that drives the free enterprise system.
Voluntary exchange is when the consumer and the producer agree to exchange money for a product both
expect to gain.
Private property rights is the idea that property owners are protected from government seizure, while
prohibiting others from using their property , and giving owners the right to buy and sell property.
Competition is when producers vie with one another to attract the consumer by creating new products that
result in more choices for the consumer.
2. What constitutional guarantees underlie the American free enterprise system?
The constitutional guarantees that underlie the American free enterprise system are private property
rights, and the freedom from unfair taxation .
3. Explain at least three benefits of the free enterprise system.
Three benefits of the free enterprise system include an open opportunity for all to compete in the
marketplace, the production of a variety of goods and services, and the idea that buyers and seller are free
to decide what will be produced.
Page 51, “Key Terms”
Profit motive: The force that encourages people and organizations to improve their material well-being.
Open opportunity: The concept that everyone can compete in the marketplace.
Legal equality: The concept of giving everyone the same legal rights.
Private property rights: The concept that people have the right and privilege to control their possessions as they
wish.
Free contract: The concept that people may decide what agreements they want to enter into.
Voluntary exchange: The concept that people may decide what and when they want to buy and sell.
Competition: The rivalry among sellers to attract customers while lowering costs.
Interest group: A private organization that tries to persuade public officials to act or vote according to group
members’ interest.
Public disclosure laws: Laws requiring companies to provide full information about their products.
Public interest: The concerns of the public as a whole.
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College Prep Economics Chapter 3, “American Free Enterprise”
Chapter 3, Section 2, “Promoting Growth and Stability”
Page 60, “Assessment”
1.
Compare macroeconomics with microeconomics and give an example of each.
Macroeconomics is the study of the behavior and decision making of entire economies, while
microeconomics is the study of the behavior and decision making of smaller units, such as families and
individuals.
Examples of macroeconomics include any study of U.S. or world economic trends. Examples of
microeconomics include family buying and budgeting decisions.
2. How does gross domestic product (GDP) provide a means to analyze economic growth?
Gross domestic product (GDP) provides a means to analyze economic growth because a strong GDP reflects
a healthy economy. A healthy economy is the result of a well-functioning free enterprise system.
3. What does GDP tell economists about business cycles?
The GDP tells economists where the nation is within a business cycle and helps them predict business
cycles.
4. Give one example of new technology that has resulted in greater productivity for the United States.
Examples of new technology that has resulted in greater productivity for the United States include the
telephone, the railroads, the automobile, and computers.
5. (a) How do patents and copyrights promote innovation?
Patents and copyrights promote innovation because patents provide inventors with exclusive rights to
market their product for a set period of time. Copyrights provide licenses for authors or artists to market
their creative work. Both patents and copyrights give innovators economic incentives to produce new
products.
(b) How does innovation help the economy?
Innovation helps the economy because the new product leads to greater productivity.
6. Describe and analyze how economic stability is measured.
Economic stability is measured by indicators such as price levels and the health of the nation’s financial
institutions. If the price of a product such as milk fluctuates significantly, the economy is unstable and
consumers and/or producers are hurt. Stability is also measured by how well financial institutions are
shielded from economic downturns.
Page 557, “Key Terms”
Macroeconomics: The study of the behavior and decision making of entire economies.
Microeconomics: The study of the economic behavior and decision making of small units, such as individuals,
families, and businesses.
Gross domestic product (GDP): The total value of all final goods and services produced in a particular economy.
Business cycle: A period of macroeconomic expansion followed by a period of contraction.
Work ethic: A commitment to the value of work and purposeful activity.
Technology: The process used to produce a good or service.
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College Prep Economics Chapter 3, “American Free Enterprise”
Chapter 3, Section 3, “Benefits of Free Enterprise”
Page 66, “Assessment”
1.
Explain this sentence: Most public goods generate positive externalities.
Most public goods generate positive externalities because they fulfill their main beneficial function while
also providing side benefits to those who do not pay for the goods. Examples of a public good that
generates positive externalities are a government building project that creates jobs and economic growth.
2. Why is a free rider a type of market failure?
A free rider is a type of market failure because they involve people consuming public goods and services for
which they have not paid. This is not an efficient distribution of goods or services.
3. What is the difference between the public sector and the private sector? Give examples of each.
The difference between the public and private sectors is that the public sector consists of goods and
services provided by the government. The private sector consists of all transactions between individuals or
businesses. Examples of public sector goods or services include Social Security and Medicare payments.
Examples of private sector transactions include the sale of merchandise at a local store and the business
of a multinational corporation.
Page 62, “Key Terms”
Public good: A shared good or service for which it would be impractical to make consumers pay individually and to
exclude non-payers.
Public sector: The part of the economy that involves transactions of the government.
Private sector: The part of the economy that involves transactions of individuals and businesses.
Free rider: Someone who would not choose to pay for a certain good or service, but who would get the benefit of it
anyway if were provided as a public good.
Market failure: A situation in which the market does not distribute resources efficiently.
Externality: 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.
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College Prep Economics Chapter 3, “American Free Enterprise”
Chapter 3, Section 4, “Benefits of Free Enterprise”
Page 70, “Assessment”
1.
How does welfare attempt to raise poor people’s standard of living?
Welfare attempts to raise poor people’s standard of living by collecting tax money from individuals and
businesses and redistributing it to people with little or no income.
2. Why does poverty exist in a free market economy?
Poverty exists in a free market economy because a free market economy generates wealth but does not
spread it evenly throughout society. The free market system rewards the most productive members of
society. As a result, people with fewer opportunities to be productive may suffer.
3. What is the difference between cash transfers and in-kind benefits?
The difference between cash transfers and in-kind benefits is that cash transfers provide people with
direct payments of money. In-kind benefits provide goods and services to low income people at free or
greatly reduced costs.
4. How is Social Security an example of income redistribution?
Social Security is an example of income redistribution because the Social Security Administration taxes a
portion of citizen’s income while they are working and redistributes it to the nation’s elderly and the
disabled.
Page 67, “Key Terms”
Poverty threshold: An income level below that which is needed to support families or households.
Welfare: Government aid to the poor.
Cash transfers: Direct payments of money to eligible poor people.
In-kind benefits: Goods and services provided for free or at greatly reduced prices.
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