Under capitalism, the basic economic decisions are made through the free interaction of individuals looking out for their own best interests
5 Characteristics of a free enterprise economy
1) Economic Freedom
Choice of where to work and for whom to work
Choice of starting a business or quitting a job
Choice to buy, sell, make whatever you want (within the limits of the law)
2) Voluntary Exchange
Buyers and sellers freely and willingly engage in market transactions
Transactions are made in such a way that both buyer and seller are (ideally) better off after the exchange (both the buyer and the seller profit from the exchange… the seller wants to sell their good/service, the buyer wants to buy the good/service)
3) Private Property Rights
People can own and control their possessions as they wish (within the law)
This applies to tangible items (cars & houses) as well as intangibles (skills & talents)
Private property (and the possibility of getting more) gives people the incentive to work, save, and invest.
They know that if they succeed, they will be able to keep any rewards they earn
4) Profit Motive
The possibility of financial gain
The driving force that encourages people and organizations to improve their material well-being
This force is responsible for the growth of the capitalist free enterprise system.
Capitalism thrives on competition
Competition is the force that drives producers to offer better quality goods/services at lower prices
The Role of the Entrepreneur
Entrepreneur organizes and manages land, labor, and capital in order to seek profit
When an entrepreneur succeeds, everybody wins: entrepreneurs get profits, workers get better paying jobs, consumers get better products, the government gets high levels of economic activity and tax revenues.
Successful businesses also spark other business to form and compete, thus driving the entire economy
Role of the Consumer
Consumer dollars = “votes” for a good/service
Consumers have the final say as to what is or isn’t produced
Consumer sovereignty : means the consumer is the one in control of the economy “The customer is always right”
The Role of Government
1) To protect the consumer from dangerous products and unscrupulous businesspeople (USDA, FDA, OSHA, etc.)
2) To provide the consumer with goods and services and to consume goods and services from producers.
Provider: streets, parks, education, buses, garbage pickup, etc.
Consumer: the government is now the second largest consuming sector of society, second only to the actual consumer sector
Promoter of National Goals
The government modifies the economic systems to promote its goals. Social security, child labor laws, minimum wage laws, etc.
We live in a modified economic system
People carry on their economic activity freely, but are subject to some government intervention and regulation
This is not a laissez-faire economy
1) In your own words, explain what “Voluntary Exchange” means
2) What is the role of the entrepreneur in a free market society?
3) Give 3 examples of goods or services provided to the public by the government.