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Chapter 3: American Free Enterprise

American free enterprise system
*investments are determined in a free market by private decision rather than by state control
*based on the principles of
– economic rights = private property rights, free contracts, voluntary exchange, competition, legal equality, freedom for producers and consumers
– profit motive = business can do what they want to maximize profits
– open opportunity = competition
economic rights
*government does not interfere in these decisions
– legal equality = same legal rights to everyone
– private property rights = right & control of possession
– free contract = decide what arguments they enter
– voluntary exchange = decide what and when to buy or sell
– competition = attract consumers by lowering costs
profit motive
*business can do what they want to, in order to maximize profits
*the force that encourages people and organization to improve their material well-being
*American free enterprise is driven by the desire for profit, the gain that occurs during financial dealings
-Profit is a powerful incentive that leads entrepreneurs and businesses to accept the risk of business failure
open opportunity
the concept that everyone can compete in the marketplace –> competition
*Producers have the right to engage in rivalries to gain business
*Competing producers have an incentive to create new and better products
-This gives consumers more economic choices
*Individuals and businesses have the right to make agreements to buy and sell goods
-Such contracts may be written or oral (= legally binding)
private property
*Individuals and businesses have the right to buy and sell as much property as they want
-Property owners may prohibit others from using their property
*one’s own personal gains
*Consumers and producers may make decisions on the basis of their own benefit
*Their decisions do not have to benefit or please the government or other consumers and producers
Voluntary Exchange
*both parties expect to gain from the transaction)
*consumers and producers may freely buy and sell goods when the opportunity costs of such exchanges are worthwhile
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
positive externality
goods generate benefits to many people, not just those who pay for goods
negative externality
some decisions to produce goods and services generate unintended costs
Fifth Amendment
*property rights, no one can take your property away without a proper compensation
*applies only to actions of the federal government
free rider problem
*someone who benefits from a good without paying for it
*the free rider problem suggest that if the government stopped collecting taxes and relied on voluntary contributions, many public services would have to be eliminated
goals for government to keep the economy “going”
*encourages the creation of positive externalities (ex: edu)
*aims to limit negative externalities (ex: acid rain)
gross domestic product (GDP)
*measures economic growth
*the total value of all final goods and services produced in an economy
*economist use this to predict the business cycle = expansion followed by decline
high standard of living
*to preserve it = to increase productivity
– with work ethic
– with technology >> granting patents and copyrights
the study of the behavior and decision making of entire economy
the study of the economic behavior and decision making of small units
poverty threshold
an income level below that which is needed to support families or households
public disclosure laws
require companies to give consumers important information about their products
public good
a shared good or service for which it would be inefficient or impractical
public interest
the concerns of the public as a whole
safety nets
set of govt programs that protect people experiencing unfavorable economic conditions
Social Security
cash transfer because individuals are free to spend their money in anyway, including having social security
unemployment insurance
cash transfer because individuals are free to spend their money in anyway, including having unemployment insurance
food stamps
an in-kind payment because because you don’t get money from it
Why does the U.S. government track and influence business cycles?
The U.S. government acts in self interest when tracking an influencing business cycle so they can make more money.

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