Free Enterprise
Economic system where people
exchange goods & svcs. free of most
government intervention
• Also known as:
o
Economics Chapter Two
Free Enterprise
in the U.S.
private enterprise,
market economy,
Capitalism, or
free market
•
•
•
•
Four Pillars of Free
Enterprise:
(basic foundation of our econ system)
1.
Four Pillars of Free
Enterprise (cond.)
Price System: as people make voluntary
exchanges, they establish the prices of goods
& svcs.
2.
Private Property:
individuals own their own
biz, not the govt. Therefore,
the indv. owner must
maintain capital resources
the
price one is willing to sell @
price one is willing to buy @
prices indicate the value consumers place on items/products, as well as
the opportunity cost of using resources:
the
•Prices
also provide incentives
price goes up, people look for bargains
•when prices go down, they buy more of the desired items
•when
Price
doesn’t always create these situations:
•more
•one
expensive = better
might choose location to live for a job
loyalty is very strong
•product
Four Pillars of Free
Enterprise (cond.)
3.
o
Market Competition: people engage in a competition
to consume scarce resources.
2 kinds of competition in markets:
Four Pillars of Free
Enterprise (cond.)
Entrepreneurship: seeing the opportunity to
make money by taking chances, introducing
new products, methods of production,
management into the market
4.
oFor
Resources: buyers compete for productive resources
(workers, oil, machinery, etc.), while sellers compete to
find these buyers
•the
more educated you are, the more likely you'll be paid more
oFor Products: buyers compete for goods & svcs. (steak,
tacos, pizza). When people want more tacos, they are
willing to pay more for them, and the price goes up. You
might in turn, buy less
•
•
entrepreneurs follow through w/ their
ideas…even the unpopular ones
free enterprise encourages entrepreneurs
•sellers compete to attract these buyers by pricing @ their wants
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FREE ENTERPRISE IN ACTION
The Circular Flow
in the Production of Shoes
Cow Grower
Consumer
must buy goods & svcs
for the Free Enterprise system to
work
$$
Cow Killer
$$
$$
Cow “Pulper”
Leather Tanner
•Consumer
("Household") consume goods
and svcs. to keep biz. going
•They also provide resources to the
production of goods (i.e., labor)
$$
$$
Shoe Maker
Feed for
Other Cows
$$
(kid in 3rd world)
$$
YOU & ME
Shoe Store
(SBE = Bad)
$$
Ideas, Terms & People
You Should Know. Ya Know?
The Circular Flow in Action
Markets for Goods
& Services
Goods & Svcs.

Medium of Exchange: trading goods & svcs for money
o
Store of Value: you can store the medium (money) for
future use
Measure of Prices: measures price & relative value of
products & resources
•
Goods & Scvs.
$$
$$
Businesses
Producing Goods
& Services
Households/Consumers
$$
Labor &
Other
Resources
$$
Markets for
Resources
Labor &
Other
Resources
o
$ is the medium (means) we value
** Money helps us put a value on the goods & svcs we want, and those
we produce
oAdam Smith: Scottish-born Economist (founded the study of
equal exchanges). Asked how we could care about well-being of
others while looking out for ourselves
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