Chapter 3: American Free Enterprise Essential Question: What role should __________ play in a _________________ economy?

Section 1: Benefits of Free Enterprise

• What is free enterprise?• An ____________ in which

____________ are made in a free market by ______ ________ and _________.

Basic principles of Free Enterprise• 1. _______________• People respond to

incentives in predictable ways.

• This is a ______________ made by economists.

• It’s not being _____, it’s ____________

• Rewards risk-taking and ______________

• Encourages making good decisions because each business is responsible for its own __________________

Basic principles continued• 2. __________________

▫Markets are free and open to everybody

▫Low barriers to entry

▫Allows economic mobility

Basic principles continued

•3. ____________________▫Everyone has the same _________▫The economy can maximize its use of

______________▫Restrict who can do certain jobs and you

are losing _________ and _______________!

Basic principles continued

•3. Private _________ is protected ________•People have an incentive to use their

property ________ or lose ___________________.

Basic Principles continued

•4. Freedom to _____________________▫right of _________________▫Voluntary _______________

The Role of the Consumer• Economists assume

voluntary exchange• Nobody makes _______ and

______ enter the _______. They voluntarily choose to do so.

• Consumers send important signals in the marketplace.

• If no one is buying a product, what can we conclude?

• If a store can’t keep something in stock, what can we conclude?

Interest Groups• Consumers may choose to

join interest groups such as the Consumers Union

• Many businesses are interest group members

Economic Freedom & The Constitution

• We think of many of our economic rights and freedoms as part of “what it means to be American” ▫ Freedom of _________▫ Freedom to ____________▫ Legal protection of that

property (____________)▫ Eminent ___________▫ _____________▫ Free __________ (easy to

enter and leave the marketplace)

Role of Government in the Marketplace

• We have an economic system based on free enterprise, but it’s not a totally free market

• Congress passes laws in the public interest▫ Public health &

safety▫ Free (open) access to

information Consumer health &

safety such as ingredients lists & nutritional information

• Public disclosure laws▫ Give info about a product

to consumers

Examples of Government Involvement

• Major Federal Regulatory Agencies▫ FDA▫ Federal Reserve (The

Fed)▫ EPA▫ FAA▫ OSHA▫ EPA

▫ See p. 54

Are regulations always good?• They…

▫ Protect _________▫ Protect _________▫ Protect the ____________

• But they can also…▫ Raise ________▫ Stifle _________ ▫ Raise ________________

Section 2: Promoting Growth and Stability• Economic transactions are

tracked by the government so they have an idea of how quickly or slowly the economy is growing

• Economics focuses on decisions made that affect the nation’s whole economy (_______________)

• AND looks at decisions made by businesses and households (________________)

How do we know if the economy is doing well?• Tracking the business

cycle▫ Is GDP (_______________)

increasing or decreasing?▫ Is unemployment up or

down?▫ Are exports increasing or

decreasing?▫ What about the value of

the dollar?

• Economics is a social science▫ ________▫ ________▫ ________

Promoting Economic Strength• The government works to keep

the economy strong in 3 main ways:1. _____________

UNemployment of approximately 5% is considered healthy

Government may take steps to create jobs if unemployment is too high

2. ______________ Is GDP increasing? Should we raise or lower

taxes? Should we increase or

decrease government spending (monetary policy)

3. _________ and _________Stable ________bank __________stable ______________

Economic Citizenship: many of these decisions are made by leaders we elect. Our choices matter and elections have consequences!

Government’s Role continued• Helps promote

technological progress▫ Encourage ___________▫ Laws that ____________▫ ______, _____________▫ Laws such as the Morrill

Land Grant Act▫ Government research

such as as that carried out by

▫ ________ and the NIH & CDC, etc.

• Part of the American psyche:

• American Work Ethic

Section 3: Providing Public Goods• This is one of the reasons why

we have government• Some goods & services wouldn’t

be available if the government didn’t provide them such as:

• Paved roads• Bridges• Schools (?)• Police & fire protection• Instead, these are public goods

▫ Benefit to each individual is less than the cost that each would have to pay if it were provided privately

▫ Total benefits to society are greater than the total cost (sewage system, for example)

• Why not?▫ Too hard _________________________________▫ Too hard to ___________

who __________ from using the good/service

▫ No incentive for the private sector to provide these goods Too _____________ Not enough __________

The Free-Rider Problem• Do people benefit from

public goods who don’t help pay for them?

• YES! They are known as “______________”

• Drivers on interstate highways

• Public radio (NPR)• Public television (PBS)• Libraries

• Public Goods are an example of _________________

• This is an instance where the market does not distribute resources ____________

• In the case of public goods, if they were provided by the private sector, you might get

• _____________________• People wouldn’t have ______

_______ to the good or service (roads not built in rural areas)

• See p. 65

______________: an economic side effect; people receive benefits or incur costs other than the producer or consumer

• Can be __________ or _____________

• Consider some examples▫ A new school built in your

community▫ A new prison built in your

community▫ A new interstate built in

your community

Externalities continued

•Remember that externalities are an example of MARKET _____________, even if they are positive externalities

•Why? Because the costs (negative) or benefits (positive) are ____________________.

•How does the government play a role?▫Creates __________ externalities such as

_____________________▫Takes steps to limit ____________

externalities

Section 4: Providing a Safety Net•Why do we have ___________?

▫Free enterprise creates wealth, but it is ___________________

▫According to the U.S. Census Bureau: In 2013, Median Household income was

$________ In 2013, the official poverty rate was _____%,

the lowest since 2006 ________% of children (under 18) live in

poverty

The government’s role

• Debate over the extent to which it is the job of the government to help the poor

• Do we have a social responsibility to take care of those who are too old or sick to work?

• What we think of as the welfare system began to take shape in the 1930s in response to the Great Depression

• It was then expanded in the 1960s as part of President Lyndon Johnson’s “War on Poverty

• Congress passed significant welfare reform in 1996▫ Lifetime limit on how long you can

receive benefits▫ States given more flexibility to

design and run their own programs ▫ State benefits are different; the

rules to qualify vary from state to state and payments, etc. vary from state to state

Types of Redistribution Programs• What we think of as _________ are redistribution

programs because they take wealth from _______ and redistribute it to the __________

• 1. One type are cash transfers (money given to states who then give it to individuals to spend)▫TANF▫Social Security

_________ people _________ people

▫Unemployment Insurance▫Workers’ Compensation

Types of Redistribution Programs continued

• 2. Another type of redistribution program are in-kind benefits▫Subsidized housing (Section 8, housing projects)▫Legal aid (based on the 6th amendment)

3. Medical BenefitsMedicare Medicaid CHIP

4. Education Federal money given to states to pay for pre-K through collegePell Grants, the FAFSA program, etc.