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Powerpoint Chapter 3 - Free Enterprise



Competition provides a variety of goods at reasonable prices.


There is a tradition of free enterprise in the United States—a tradition that encourages people to try out their business ideas and compete in the public market. Both Mr. Scappoose, the immigrant who opened a barber shop, and Bill Gates, the young man who founded Microsoft, are part of this tradition, and both are entrepreneurs with a desire to succeed and profit. In the free enterprise economy, consumers, acting on their own, decide to buy products. Their individual choices signal the producers what to produce and how much to make. The result is a variety of products at reasonable prices. We expect government to protect consumers by assuring that they have the information they need to make informed

decisions. Government laws, such as those protecting the right to private property and enforcing contracts, help Americans benefit from free enterprise. The Constitution also specifies how government can tax, and it prohibits government from interfering in business contracts. Finally, federal and state agencies regulate industries whose goods and services affect the wellbeing of the public.


Features of American Free Enterprise

  • Competition

  • Economic

  • Freedom

  • Contracts Profit Motive

  • Voluntary

  • Exchange

  • Private Property

  • Self-Interest




Government attempts to regulate business cycles and to encourage economic growth.


To keep the huge American economy on course, government economists follow macroeconomic trends. Macroeconomics is the study of the behavior and decision making of entire economies. By contrast, microeconomics is the study of economic behavior of individuals, families, and businesses. Macroeconomic progress is measured by calculating a nation’s gross domestic product (GDP). This is the total value of all final goods and services produced in a year. Measuring the change in GDP from one year to the next is one way of measuring growth or decline in an economy. Free enterprise systems are subject to sudden swings in business cycles, periods of macroeconomic growth followed by slowing or decline. To stabilize the economy and prevent wide swings, the government has three main goals: high employment, steady economic growth, and stable prices. Government policymakers use different policies and tools in their attempts to achieve these goals. One way Americans maintain their high standard of living is by constantly improving technology. Technology is the process used to produce a good or service. Progress in technology helps the economy to be more efficient and productive. For example, Thomas Edison’s invention of the light bulb in 1879 made possible a longer work day. To advance technological progress, government policies encourage innovation. Federal agencies fund research and development projects at universities and private companies. The government also provides patents and copyrights. This encourages inventors by protecting their ideas.


Government economists use a variety of policies in their attempt to achieve their three major goals.



  • High Employment - Providing jobs for everyone who is able to work

  • Steady Growth - Enabling each generation to enjoy a higher standard of living than previous generations

  • Stable Prices -Preventing sudden shifts in prices









Free markets tend to spread wealth unevenly. This leaves some people below the poverty threshold. The poverty threshold is the minimum level of income, as determined by the government, that is needed to support a household. To help ease poverty, the government collects tax money and redistributes it to people who are poor or otherwise in need. This kind of aid is known as welfare. In the 1990s, welfare programs became subject to much debate. Critics charged that people were becoming dependent on their welfare payments and were not doing enough to help themselves. Despite these debates, welfare programs continue to function in the United States. One major program is Temporary Aid to Needy Families (TANF). It uses cash transfers, direct payments of money, to help poor people. Money provided by the federal government goes to the states, which design their own welfare programs. Another major program is Social Security, which provides cash transfers to the elderly retired and to people who are disabled. It is funded from taxes on people’s wages. The government also provides in-kind benefits—goods and services provided for free or at very low prices. Examples of in-kind benefits include food stamps and subsidized housing. Another important social service that the government provides is health insurance. Medicare, which provides aid to the elderly, and Medicaid, which assists the poor, are two health insurance programs.











Have students search the local newspaper,

The New York Times, The Wall Street

Journal, Business Week, or some other

magazine for articles that describe the

features of a market-based economic

system. Have students classify the articles

according to the features they


Have student groups make lists of the

characteristics of other economic systems

and compare and contrast these

characteristics with those of a market


Conduct a class debate on the following

issue: “Resolved: The well-being of the

United States depends on the active

involvement of the government in all

economic affairs.”













Key terms and concepts:

scarcity, trade-offs, choices, opportunity costs,

limited resources, unlimited wants, growth,

stability, economic fairness, productivity,