Unit 7- Foundations of Economics: Characteristics of the American Economy Questions/Main Ideas: Notes: Introduction to Characteristics of the American Economy The United States economy functions with the following key characteristics: 1. Capitalism/laissez-faire 2. Freedom of enterprise 3. Freedom of choice 4. Private property 5. Profit motive 6. Competition Capitalism The Founders of the U.S. were greatly influenced by the writings of Capitalist, Adam Smith. Smith stated that capitalism is where private individuals own the factors of production (land, labor, capital, entrepreneurship). Capitalism is also called a laissez-faire system (French for “let the people do as they choose”). While the idea of capitalism calls for limited government involvement, in the U.S. we have had some government regulation involved in our economy since the 1880’s o EX: regulating food and drug quality, banking practices, quality of work places, etc. Freedom of Enterprise Freedom of Choice Profit Incentive Our U.S. economy is also known as a free-enterprise system, which means that individuals are free to own and control the factors of production. The government does require some regulation (zoning, permits, and business licensing) but otherwise, you are free to create any business for which you are suited and qualified to own and operate. Another key characteristic of the American economy is the fact that buyers make the decisions about what should be produced by their spending habits. The success or failure of a good or service in the marketplace depends on the buyers freedom to choose what they want to purchase. Again, although the buyer is dictating what is being produced by his or her purchase practices, the government has stepped in at times to regulate the quality of items being produced—in an effort to protect the consumer against unfair pricing or unsafe products. Another trademark is the American economic system is profit incentive (or profit motive). This means that when a producer/entrepreneur invests capital (time, labor, money, etc.) to produce a good or service, the goal is to gain a profit– money left over after all the costs of production have been paid. Competition Private Property IN any free-enterprise system, profit incentive encourages competition, which is a rivalry between producers of similar products to win more business by offering lower prices or better quality. Competition requires a large number of sellers so that no one company can set the price on a good or service. Perhaps one of the most important characteristic of the American economy, is private property. This is property owned by individuals or groups instead of by the any level of government. This is essentially what distinguishes a capitalist economy from a command economy. The ability for private individuals or companies to own the factors of production instead of the government. Summary, Reflection, Analysis Question: In a Capitalist system, why might business owners resist government intervention in their business?