Capitalism and Free
Enterprise
Chapter 19, Section 3
Capitalism – The American Economic
System (also called Free Enterprise)
What are the benefits of capitalism and why has it
spread to so many countries?
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Individuals own most, if not all, resources and
control their use
Capitalism has been the only economic system
to continue economic growth for the 200 years
since the Industrial Revolution.
Where did the idea of capitalism come
from?
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No one person invented it.
It developed gradually from economic and political
changes in medieval and early modern Europe
over hundreds of years.
Two important concepts laid the foundation for the
market system that is at the heart of capitalism.
a. People should work for economic gain
b. Government should have limited role in the
economy
Adam Smith, “The Wealth of Nations”
Scottish philosopher Adam Smith is
the author of the 1776 book An
Inquiry into the Nature and Causes of
the Wealth of Nations, a classic of
modern economics beloved
especially by free market advocates.
He began his academic career as a
professor of logic and moral
philosophy.
Known as the Father of Modern
Capitalism and Free Enterprise
The Wealth of Nations
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Scientifically described the basic principles
of economics for the first time
Smith believed that individuals seeking
profit, end up benefiting society as a whole.
From the writings of Smith and others came
the basic idea of “laissez-faire” economics.
“The invisible hand”
concept
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The invisible hand is a metaphor coined by the economist
Adam Smith. In The Wealth of Nations and other writings,
Smith demonstrated that, in a free market, an individual
pursuing his own self-interest tends to also promote the
good of his community as a whole through a principle that
he called “the invisible hand”. He argued that each
individual maximizing revenue for himself maximizes the
total revenue of society as a whole, as this is identical with
the sum total of individual revenues.
Smith used the term 'invisible hand' only three times, but
the metaphor later gained widespread use.
Laissez-Faire Economics
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From a French term
meaning “let alone”.
Laissez-faire philosophy
believes government
should not interfere in the
marketplace.
The government’s role is
strictly limited to those few
actions needed to insure
free competition in the
marketplace.
Laissez Faire in U.S. Economics
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The political side of laissez-faire held that the best government was
the one that governed least. This view enjoyed its heyday during
the industrial revolution of the late nineteenth century (though it did
not preclude protective tariffs).
Its last hurrah in the 1920s reflected the view that government had
grown too large as a result of progressive regulatory expansion and
wartime economic controls. Moreover, big business—once the
progressives' whipping boy—had regained popular esteem through
its war production success.
Getting government off the back of business therefore became a
primary goal of the Republican administrations of Warren Harding
and Calvin Coolidge.
This led to the Great Depression in 1929.
Features of Capitalism
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Markets
Economic Freedom
Private Property Rights
Competition
The Profit Motive
Voluntary Exchange
Markets
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When you go to work, your labor is
being sold in the factor market.
When you go shopping, the goods
and services you buy are being
purchased in the product market.
Markets are the places
where the prices of goods
and services are
determined as exchange
takes place.
Markets do more than set
prices. They are
mechanisms that connect
the different sectors of
the economy.
Economic Freedom
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Choice is a key element
in the free enterprise
system
Consumers have the
right to choose the
products they buy
Business have the right
to choose the products
they will produce and
offer for sale
Private Property Rights
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We have the freedom to own and use or
dispose of our own property as we choose
as long as we do not interfere with the
rights of others.
Competition
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Capitalism thrives on
competition.
Competition is the struggle
that goes on between buyers
and sellers to get the best
products at the lowest prices.
Competition between sellers
keeps the costs of production
low and the quality of goods
high.
Buyers compete among
themselves to find the best
products at the lowest prices.
Why is competition so important?
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Competition rewards the
most efficient producers.
Competition forces the
least efficient producers
out of business.
Competition makes for
efficient production, higher
quality products, and more
satisfied consumers.
The Profit Motive
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The driving force that encourages
individuals and organizations to improve
their material well being
Profit=amount of $$ left over after all the
costs of production have been paid.
Motive=the desire to do better at a risk
Voluntary Exchange
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The act of buyers and sellers freely and willingly
engaging in market transactions.
Both the buyer and the seller benefit.
Productivity
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A measure of the amount of output
produced by a given amount of inputs in a
specific amount of time.
Productivity goes up whenever more output
can be produced with the same amount of
input.
In terms of labor, the same number of workers
triple the number of TV’s they produce in a
week. Output (productivity) has increased
without an increase in input (labor).
Specialization
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Takes place when
people, businesses,
regions, even
countries
concentrate on
goods or services
they can produce
better than anyone
else.
The French have long been
specialists in wine making. Since
the 1980’s California wines have
begun to rival the specialization of
France.
What are some products North
Carolina specializes in?
Division of Labor
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The breaking down of
a job into separate,
smaller tasks which
are performed by
different workers.
A form of
specialization that
improves productivity.
Human Capital
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Productivity tends to
increase when businesses
invest in human
capital…the sum of the
skills, abilities, and
motivation of people.
business investments in
training, health care and
employee motivation tend
to increase the amount of
production that takes
place.
Consumer Rights and Responsibilities
To make good economic decisions, we need
to be aware of our rights and
responsibilities as consumers.
“Caveat Emptor”
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Throughout most of
history consumer
rights could be
summed up with this
one Latin phrase
meaning “Let the
buyer beware”.
Consumerism
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A movement to
educate buyers about
the purchases they
make and to demand
better and safer
products from
manufacturers that
affect you personally.
Laws which protect consumer rights
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Fair Packaging and Labeling Act
Pure Food and Drug Act
Consumer Bill of Rights
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John F. Kennedy had equated the rights of the ordinary American
consumer with national interest. He gave the American consumer four
basic rights:
The Right to Safety - to be protected against the marketing of goods which
are hazardous to health or life.
The Right to Choose - to be assured, wherever possible, access to a
variety of products and services at competitive prices: and in those
industries where competition is not workable and Government regulation is
substituted, an assurance of satisfactory quality and service at fair prices.
The Right to Information - to be protected against fraudulent, deceitful or
grossly misleading information, advertising, labeling, or other practices, and
to be given the facts s/he needs to make an informed choice.
The Right to be Heard - to be assured that consumer interests will receive
full and sympathetic consideration in the formulation of Government policy,
and fair and expeditious treatment in its administrative tribunals.
The Right to Redress – obtain payment from manufacturers if their product
causes financial or physical damage.
Consumer Responsibilities
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Follow warranty
directions
Exhibit ethical
behavior
Uses of Income
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Disposable Income – the money a person
has left after all the taxes on it have been
paid. Usually people buy necessities out of
this such as food, clothing and housing.
Discretionary Income – money left over
after buying necessities, used for satisfying
wants such as luxuries or putting in a
savings account.
Decision Making
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All the steps in decision making involve an
opportunity cost.
You must decide if your purchase is worth
what you have to give up to own it.
Question One
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__________ can improve productivity.
a.
b.
c.
d.
Trading with the foreign sector
Cost-benefit analysis
Government revenue
Specialization
Question Two
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Some of the characteristics of capitalism are
__________.
a. competition, profit, and government ownership
of resources
b. markets, government-set prices, and private
property
c. markets, private property, competition, and
profits
d. competition, profit, and production based on
custom and tradition
Question Three
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The author of The Wealth of Nations was
__________.
a. Alexander Hamilton
b. Adam Smith
c. Thomas Mann Randolph
d. Thomas Jefferson
Question Four
In laissez-faire economics, the government's role is . ..
a. strictly limited to those few actions
needed to ensure free competition in the
marketplace
b. to tell producers what and how much to produce
c. to set prices for all goods and services produced
d. to completely refrain from any involvement in the
marketplace
Question Five
A group that provides information about local
businesses and warns consumers about
dishonest business practices is the
a. Consumer Rights Council
b. Consumer's Voice
c. Commission on Consumer Safety
d. Better Business Bureau
Question Six
The money income that a person has left
after taxes is called __________.
a.
b.
c.
d.
discretionary income
disposable income
ethical income
savings income
Question Seven
The factors of production are __________.
a. natural resources, labor, capital, and money
b. natural resources, capital, goods, and
services
c. natural resources, labor, capital, and
entrepreneurs
d. natural resources, money, labor, and
entrepreneurs
Question Eight
Capital goods are __________.
a.
b.
c.
d.
used to make other products
used to satisfy consumer wants directly
money, in all of its forms
mineral deposits and fossil fuels
Question Nine
Gross Domestic Product is __________.
a. the total value of all goods and services
produced in a single year
b. the total value of all final goods and
services produced in a single year
c. the total value of all capital goods produced in a
single year
d. the total value of all labor produced in a single
year
Question Ten
Consumers earn their income in ________.
a.
b.
c.
d.
the consumer sector
the product market
factor markets
the business sector
Question Eleven
What is the “invisible hand” described by
Adam Smith in “The Wealth of Nations”?
a.
b.
c.
d.
Self-interest of individuals
Business guidelines
Economic benefits
Free enterprise system
Question Twelve
What is another name for a Market
Economy?
a.
b.
c.
d.
Communism and free markets
Capitalism and free enterprise
Fascism and military control
Socialism and government controls