EP Notes

Unit 7- Foundations of Economics:
Characteristics of the American Economy
Questions/Main Ideas:
Introduction to
Characteristics of the
American Economy
The United States economy functions with the following key
1. Capitalism/laissez-faire
2. Freedom of enterprise
3. Freedom of choice
4. Private property
5. Profit motive
6. Competition
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
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.
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?