The Free Market System

&

The United States of America

An economic system refers to the laws and institutions in a nation that determine who owns economic resources, how people buy and sell those resources, and how the production process makes use of resources in providing goods and services.

Free-Market Economy, The market system is an economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions.

This system is based in a belief in:

Capitalism, economic system in which private individuals and business firms carry on the production and exchange of goods and services through a complex network of prices and markets.

The Free market system came out of the Industrial revolution and the advent of the Factory System.

The principles underlying free-market economies are based on laissez-faire (non-intervention by government) economics and can be traced to the 18th-century Scottish economist Adam Smith.

In a free-market economy the government's function is limited to providing what are known as “public goods” and performing a regulatory role in certain situations.

Public goods, which include defense, law and order, and education, have two characteristics: consumption by one individual does not reduce the amount of the good left for others; and the benefits that an individual receives do not depend on that person's contribution.

An example is a lighthouse. One individual's use of light provided by a lighthouse does not reduce the ability of others to use it. In addition, the lighthouse owner cannot restrict individuals from using the light.

Government's role in a free-market economy also includes protecting private property, enforcing contracts, and regulating certain economic activities. Governments generally regulate “natural monopolies” such as utilities or rail service

These industries require such a large investment that it would not be profitable to have more than one provider. Regulation is used in place of competition to prevent these monopolies from making excessive profits.

Proponents of free-market economies believe they provide a number of advantages. • encouraging individual responsibility for decisions.

•economic freedom is essential to political freedom.

•free markets are more efficient in economic terms.

•Free markets provide incentives both to individuals to allocate resources, such as labor and capital, and to firms to produce goods and services that the public wants.

Free-market economies are criticized;

• Opponents believe that a free-market economy cannot ensure basic social values, such as alleviating poverty, or that the income distribution that results from a free-market economy may not be equitable.

•A free-market economy may also permit the accumulation of vast wealth and powerful vested interests that could threaten the survival of political freedom.

Free Market

In

The USA

Life, Liberty and the pursuit of Happiness.

This is the basis of the American constitution, that everyone has the right to the above. It is from this that the American economic system stems.

The U.S. economy is made up of individual people, business and labor organizations, and social institutions.

People have many different economic roles—they function as consumers, workers, savers, and investors.

Some of the most important organizations in the U.S. economy are businesses that produce and distribute goods and services to consumers.

These businesses can take many different forms.

A Corporation, is an organization created by a government charter that allows people to associate together for a common purpose under a common name. The charter gives the corporation certain privileges, including the right to buy and sell property, enter into contracts, sue and be sued, and borrow and lend money. In the United States, state governments charter most corporations.

Although corporations account for only about 20 percent of all businesses in the United States, they generate about 90 percent of all business income.

Franchise, in government and economics, a special right or privilege granted to an individual or a group to carry on a particular activity. The term is used in several ways. A municipality, for example, awards franchises to corporations to operate public utilities, such as electric and telephone services, in a given area. Rates to be charged and services to be provided to the public, as well as tenure and labor regulations, are stipulated in a contract between the parties.

In business, the term franchise refers to the exclusive right given to someone to market a company's goods or services in a designated territory. In return for a specified fee and usually a share of the profits, the franchisor provides the product, the name, and sometimes the physical plant and the advertising. One well-known example of a franchised business is McDonald's, the fast-food restaurant chain.

Private enterprise is undertaken by private individuals who hope to realize a profit from their activities and who bear any risk associated with those activities. Proponents of private enterprise believe that it promotes individual ingenuity and efficiency, particularly when such enterprises are free of government regulation.

Partnership A term applied to an association of two or more persons who have agreed to combine their labor, property, and skill, or some or all of them, for the purpose of engaging in lawful business and sharing profits and losses between them; in this definition the term business includes every trade, occupation, and profession.

Positives

•Consumer choices – consumers are free to choose what they want to buy and where.

•Wealth of product choices – Consumers have a large selection of products and companies to choose from.

Negatives

•Caveat Emptor (Latin, “let the buyer beware”)

•Decentralized Market – hard to control harmful goods (cigarettes, alcohol)

•Profit motives – these can conflict with the governments agenda.

•Dog eat dog – larger companies can easily devour smaller businesses.

•Wealth distribution – all the money in the hands of a very rich few

Monetary Policy, economic principles and programs adopted by a government that manage the growth of its money supply, the availability of credit, and interest rates. In the United States, the Federal Reserve Board determines monetary policy.

Fiscal Policy, government policy related to taxation and public spending. Fiscal policy and monetary policy, which is concerned with money supply, are the two most important components of a government's overall economic policy, and governments use them in an attempt to maintain economic growth, high employment, and low inflation.