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Splash Screen

• Section 3

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Chapter Introduction 1
Economics and You
In Chapter 2, you will learn how economic
systems differ and what makes up the major
characteristics of the United States market
system.
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and You.
3
Chapter Introduction 2
Chapter Objectives
Section 1 Economic Systems

• Describe the characteristics of the traditional,
  command, and market economies. ?

• Explain the advantages and disadvantages of the
  traditional, command, and market economies.

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Chapter Introduction 3
Chapter Objectives
Section 2 Evaluating Economic Performance

• Describe the basic economic and social groups
  used to evaluate economic performance. ?

• Evaluate the tradeoffs among economic and social
  goals.

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Chapter Introduction 4
Chapter Objectives
Section 3 Capitalism and Economic Freedom

• Explore the characteristics of a free enterprise
  system. ?

• Describe the role of the entrepreneur, the
  consumer, and government in a free enterprise
  economy.

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End of Chapter Introduction
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7
Section 3-1
Study Guide
Main Idea
Under capitalism, the basic economic decisions
are made through the free interaction of
individuals looking out for their own best
interests. ?
Reading Strategy
Graphic Organizer As you read the section,
complete a graphic organizer like the one on page
46 of your textbook to identify the five
characteristics of a free enterprise economy.
Then provide an example of each.
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46 of your textbook.
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Section 3-2
Study Guide (cont.)
Key Terms

• capitalism ?

• free enterprise ?
• voluntary exchange ?
• private property rights ?
• profit ?
• profit motive ?
• competition ?
• consumer sovereignty ?
• mixed economy ?
• modified private enterprise economy

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Section 3-3
Study Guide (cont.)
Objectives
After studying this section, you will be able to
?

• Explore the characteristics of a free enterprise
  system. ?
• Describe the role of the entrepreneur, the
  consumer, and government in a free enterprise
  economy. ?

Applying Economic Concepts
Voluntary Exchange Why is voluntary exchange one
of the most popular features of a market economy?
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46 of your textbook.
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Section 3-4
Introduction

• A market economy is normally based on a system of
  capitalism, where private citizens, many of whom
  are entrepreneurs, own the factors of production.
  ?

• Free enterprise is another term used to describe
  the American economy. ?
• In a free enterprise economy, competition is
  allowed to flourish with a minimum of government
  interference.

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Section 3-5
Competition and Free Enterprise

• A free enterprise economy has five important
  characteristicseconomic freedom, voluntary
  exchange, private property rights, the profit
  motive, and competition.

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Section 3-6
Economic Freedom

• Individuals as well as businesses enjoy economic
  freedom, the first characteristic of capitalism.
  ?

• With economic freedom, people can choose to have
  their own business or to work for someone else. ?
• Economic freedom also means that people can leave
  jobs and move on to others that offer greater
  opportunity. ?
• Businesses also enjoy economic freedom.

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Section 3-7
Voluntary Exchange

• A second characteristic of capitalism is
  voluntary exchangethe act of buyers and sellers
  freely and willingly engaging in market
  transactions. ?

• Market transactions are made in such a way that
  both the buyer and the seller are better off
  after the exchange than before it occurred. ?
• Buyers, for example, can do many things with
  their money. ?
• With voluntary exchange, sellers also have many
  opportunities to sell their products.

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Section 3-8
Voluntary Exchange (cont.)

• In the end, the transaction benefits both buyer
  and seller or it would not have taken place. ?

• Both the buyer and the seller obtained something
  they believed had more value than the money or
  products they gave up.

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Section 3-9
Private Property Rights

• Another major feature of capitalism is the
  concept of private property rights, the privilege
  that entitles people to own and control their
  possessions as they wish. ?

• Private property includes both tangible items
  such as houses and cars, and intangible items
  such as skills and talents. ?
• People are free to make decisions about their
  property and their own abilities. ?
• Private property gives people the incentive to
  work, save, and invest.

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Section 3-10
Profit Motive

• Under free enterprise and capitalism, people are
  free to risk their savings or any part of their
  wealth in a business venture. ?

• The very possibility of financial gain, however,
  encourages many people to become entrepreneurs,
  or those who risk entering business in hopes of
  earning a profit. ?
• Profit is the extent to which persons or
  organizations are better off at the end of a
  period than they were at the beginning.

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Section 3-11
Profit Motive (cont.)

• The profit motivethe driving force that
  encourages people and organizations to improve
  their material well-beingis largely responsible
  for the growth of a free enterprise system based
  on capitalism.

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Section 3-12
Competition

• Finally, capitalism thrives on competition the
  struggle among sellers to attract consumers while
  lowering costs. ?

• Competition is possible because private
  individuals, acting as entrepreneurs, own the
  factors of production and have the freedom to
  produce the products they think will be the most
  profitable. ?
• Because capitalism is based on freedom and
  voluntary exchange, buyers compete to find the
  best products at the lowest prices.

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Section 3-13
20
Section 3-13
The Role of the Entrepreneur

• The entrepreneur is one of the most important
  people in the economy. ?

• Entrepreneurs are the ones who start up new
  businesses such as restaurants, automobile repair
  shops, Internet stores, and video arcades. ?

• Entrepreneurs want to be their own boss and are
  willing to risk everything to make their dreams
  come true. ?
• Only a very few manage to become fantastically
  wealthy and famous. Many entrepreneurs fail.

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Section 3-14
The Role of the Entrepreneur (cont.)

• Despite the high rate of failure among
  entrepreneurs, the dream of success is often too
  great to resist. ?

• The entrepreneur is both the sparkplug and the
  catalyst of the free enterprise economy. ?
• When an entrepreneur is successful, everybody
  benefits. ?
• In the end, the entrepreneurs search for profits
  can lead to a chain of events that involves new
  products, greater competition, more production,
  higher quality, and lower prices for consumers.

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Section 3-15
The Role of the Consumer

• In the United States, consumers often are thought
  of as having power in the economy because they
  determine which products are ultimately produced.
  ?

• For example, a company may try to sell a certain
  item to the public who then can choose to accept
  or deny the product, thus deciding the fate of
  the product or firm. ?
• Consumer sovereignty describes the role of the
  consumer as sovereign, or ruler, of the market.

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Section 3-16
The Role of the Consumer (cont.)

• In recent years, producers have had outstanding
  successes with various products, including home
  video games, sport utility vehicles, and personal
  computers. ?

• Consumers wants change constantly as modern
  communications and travel expose people to new
  ideas and products. ?
• Consumers, then, play an important role in the
  American free enterprise economy.

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Section 3-17
The Role of the Consumer (cont.)

• They have a say in what isand what is
  notproduced when they express their wants in the
  form of purchases in the marketplace. ?

• The dollars they spend are the votes used to
  select the most popular products.

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Section 3-18
The Role of Government

• Governmentwhether national, state, or localhas
  an economic role to play that reflects the
  desires, goals, and aspirations of its citizens. ?

• Government has become involved in the economy
  because Americans want its involvement. ?
• The government has become a protector, provider
  of goods and services, consumer, regulator, and
  promoter of national goals. ?
• The role of government is normally justified
  whenever its benefits outweigh its costs.

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Section 3-19
Protector

• As protector, the United States government
  enforces laws such as those against false and
  misleading advertising, unsafe food and drugs,
  environmental hazards, and unsafe automobiles. ?

• It also enforces laws against abuses of
  individual freedoms. ?
• The government protects property rights, enforces
  contracts, and generally tries to make sure that
  everyone follows the rules of the game to
  ensure an efficient and fair economy.

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Section 3-20
Provider and Consumer

• All levels of government provide goods and
  services for citizens. ?

• The national government, for example, supplies
  defense services. ?
• State governments provide education and public
  welfare. ?
• Local governments provide, among other things,
  parks, libraries, and bus services. ?

• In the process of providing, government consumes
  factors of production just like any other form of
  business.

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Section 3-21
Regulator

• In its role as a regulator, the national
  government is charged with preserving competition
  in the marketplace. ?

• It also oversees interstate commerce,
  communications, and even entire industries such
  as banking and nuclear power. ?
• The regulatory role of government is often
  controversial. ?
• Most businesses do not like to be told how to run
  their affairs, and they argue that consumers can
  always sue in court if there are problems.

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Section 3-22
Regulator (cont.)

• On the other hand, many consumers feel that they
  do not always know when they are at riskas in
  the case of potential food poisoning from unsafe
  food preparation practices. ?

• As a result, consumers usually think that the
  government is in a better position to monitor and
  regulate such activities.

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Section 3-23
Promoter of National Goals

• Government reflects the will of a majority of its
  people. ?

• As a result, many government functions reflect
  peoples desire to modify the economic system to
  achieve the economic goals of freedom,
  efficiency, equity, security, full employment,
  price stability, and economic growth. ?
• A government program such as Social Security, as
  well as laws dealing with child labor and the
  minimum wage, reveal how Americans have modified
  their free enterprise economy.

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Section 3-24
Promoter of National Goals (cont.)

• Because of these modifications, and because there
  are some elements of tradition in our economy,
  the United States is said to have a mixed
  economy, or a modified private enterprise
  economy. ?

• In a mixed economy people carry on their economic
  affairs freely, but are subject to some
  government intervention and regulation. ?
• This system most likely will undergo further
  change as the goals and objectives of the
  American people change.

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Section 3-Assessment 1
Section Assessment
Main Idea Using your notes from the graphic
organizer activity on page 46 of your textbook,
explain how the basic economic decisions are made
under capitalism.
They are made through free interaction of
individuals looking out for their own best
interests.
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display the answer.
33
Section 3-Assessment 2
Section Assessment (cont.)
List the five major characteristics of a free
enterprise system.
The five major characteristics are economic
freedom, voluntary exchange, private property,
profit motive, and competition.
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34
Section 3-Assessment 3
Section Assessment (cont.)
Describe the role of the entrepreneur.
The entrepreneur organizes and manages land,
capital, labor and starts up businesses.
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35
Section 3-Assessment 4
Section Assessment (cont.)
Explain the importance of the consumer in a free
enterprise system.
They determine what is, and what is not, produced
when they express their wants in the form of
purchases in the marketplace.
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36
Section 3-Assessment 5
Section Assessment (cont.)
Identify the role of the government in a free
enterprise economy.
The government acts as a protector, provider and
consumer, regulator, and promoter of national
goods.
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Section 3-Assessment 6
Section Assessment (cont.)
Voluntary Exchange Cite at least three examples
of voluntary exchanges that you made this week.
How are you better off by having made the
exchanges? Did the person with whom you exchanged
gain too? How?
Answers will vary.
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Section 3-Assessment 7
Section Assessment (cont.)
Understanding Cause and Effect Americans have
varying economic goals. How have these
often-competing goals modified our free
enterprise economy?
They have modified our economy through increased
government intervention in the economy in the
form of programs like Social Security and laws
dealing with minimum wage and child labor.
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Section 3-Assessment 8
Section Close
In small groups, make brief presentations on the
lesson plans you have developed for the Extra
Credit Project on page 32 of your textbook. Then
discuss what makes the free enterprise system
unique.
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End of Section 3
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41
Chapter Summary 1
Section 1 Economic Systems

• Every society has an economy or economic system,
  a way of allocating goods and services to satisfy
  the WHAT, HOW, and FOR WHOM questions. ?

• In a traditional economy, the major economic
  decisions are made according to custom and habit.
  Life in these economies tends to be stable,
  predictable, and continuous. ?
• In a command economy, government makes the major
  economic decisions. Command economies can change
  direction drastically in a short time, focusing
  on whatever the government chooses to promote.

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Chapter Summary 2
Section 1 Economic Systems (cont.)

• Command economies tend to have little economic
  freedom, few consumer goods, and little
  uncertainty. ?

• A market economy features decentralized decision
  making with people and firms operating in their
  own self-interests. ?
• A market economy adjusts gradually to change, has
  a high degree of individual freedom and little
  government interference, is highly decentralized,
  and offers a wide variety of goods and services
  that help to satisfy consumers wants and needs.

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Chapter Summary 3
Section 2 Evaluating Economic Performance

• The social and economic goals of U.S. society
  include economic freedom, economic efficiency,
  economic equity, economic security, full
  employment, price stability, and economic growth.
  ?

• When goals conflict, society evaluates the costs
  and benefits of each in order to promote one goal
  over another many election issues reflect these
  conflicts and choices. ?
• Peoples goals are likely to change in the
  future, as our economy evolves.

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Chapter Summary 5
Section 3 Capitalism and Economic Freedom

• Capitalism is a competitive economic system in
  which private citizens own the factors of
  production. ?

• The five characteristics of capitalism are
  economic freedom, voluntary exchange, private
  property rights, profit motive, and competition.
  ?
• The entrepreneur is the individual who organizes
  land, capital, and labor for production in hopes
  of earning a profit the profit motive is the
  driving force in capitalism.

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45
Chapter Summary 6
Section 3 Capitalism and Economic Freedom (cont.)

• In capitalism, firms are in business to make a
  profit. To do this they must offer products
  consumers want at competitive prices. ?

• Consumer sovereignty states that the consumer is
  the one who decides WHAT goods and services to
  produce. ?
• The national government plays the role of
  protector, provider and consumer, regulator, and
  promoter of economic goals.

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46
Chapter Summary 7
Section 3 Capitalism and Economic Freedom (cont.)

• The United States has a mixed economy, or a
  modified private enterprise economy, in which its
  citizens carry on their economic affairs freely
  but are subject to some government intervention
  and regulation.

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End of Chapter Summary
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48
Chapter Assessment 1
Identifying Key Terms
Match the letter of the term best described by
each statement.
C D H
___ the idea that people rule the market ___ a
societys organized way of providing for its
peoples wants and needs ___ the driving force
that encourages people and organizations to try
to improve their material well-being
A. capitalism F. inflation B. command economy
G. private property rights C. consumer
sovereignty H. profit motive D. economic system
I. traditional economy E. fixed
income J. voluntary exchange
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49
Chapter Assessment 2
Identifying Key Terms (cont.)
Match the letter of the term best described by
each statement.
F A G
___ a rise in the general level of prices ___ a
system in which the factors of production are
owned by private citizens ___ the right and
privilege to control ones own possessions
A. capitalism F. inflation B. command economy
G. private property rights C. consumer
sovereignty H. profit motive D. economic system
I. traditional economy E. fixed
income J. voluntary exchange
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50
Chapter Assessment 3
Identifying Key Terms (cont.)
Match the letter of the term best described by
each statement.
I B
___ an economic system in which ritual, habit,
and custom dictate most economic and social
behavior ___ an economic system in which a
central authority makes economic decisions
A. capitalism F. inflation B. command economy
G. private property rights C. consumer
sovereignty H. profit motive D. economic system
I. traditional economy E. fixed
income J. voluntary exchange
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51
Chapter Assessment 4
Identifying Key Terms (cont.)
Match the letter of the term best described by
each statement.
E J
___ the situation in which the money an
individual receives does not increase even though
prices go up ___ the act of buyers and sellers
freely conducting business in a market
A. capitalism F. inflation B. command economy
G. private property rights C. consumer
sovereignty H. profit motive D. economic system
I. traditional economy E. fixed
income J. voluntary exchange
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52
Chapter Assessment 5
Reviewing the Facts
Describe the main strength and weakness of a
traditional economy.
strength everyone knows which role to play
weakness discourages new ideas and new ways
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Chapter Assessment 6
Reviewing the Facts (cont.)
List the five major weaknesses of the command
economy.
does not meet needs and wants of consumers lacks
effective incentives for people to work hard
requires large bureaucracy that consumes
resources has little flexibility new ideas and
individuality discouraged
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Chapter Assessment 7
Reviewing the Facts (cont.)
Describe how a market economy, a traditional
economy, and a command economy adapt to change.
Traditional often punishes those who attempt to
change the way things are done Command problems
adjusting to changes because of inflexibility
Market flexible and can adjust to change
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55
Chapter Assessment 8
Reviewing the Facts (cont.)
Describe the seven major economic goals which
most Americans agree on.
economic freedomfreedom to make ones own
economic decisions economic efficiencyrecognitio
n that resources are scarce and need to be used
wisely economic equitybelief that the economy
should be managed justly, impartially, and
fairly economic securityprotection from effects
of adverse economic events full
employmentdesire for the economic system to
provide as many jobs as possible price
stabilitydesire for stable prices economic
growthproduction of more and better goods and
services
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Chapter Assessment 9
Reviewing the Facts (cont.)
Explain how society resolves the conflict among
goals which conflict.
economic system is flexible, allows choices, and
accommodates compromises
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Chapter Assessment 10
Reviewing the Facts (cont.)
State how people and businesses benefit from
economic freedom.
People can choose their employer, where and when
they work, and how they spend their money.
Businesses hire the best workers, and decide what
and how to produce and what prices to charge.
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Chapter Assessment 11
Reviewing the Facts (cont.)
Explain the importance of the entrepreneur in a
free enterprise economy.
When entrepreneurs succeed, they benefit by
gaining profits workers benefit through jobs and
higher wages consumers benefit by having more
and better products to buy and government
benefits through greater tax revenues.
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59
Chapter Assessment 12
Reviewing the Facts (cont.)
Provide examples of how the government acts as
protector, provider and consumer of goods and
services, regulator, and promoter of national
goals.
protectorenforces laws against false
advertising provider and consumerprovides
highways, uses productive resources
regulatoroversees interstate commerce promoter
of goalsminimum wage promotes equity
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Chapter Assessment 13
Thinking Critically
Drawing Conclusions Some people believe the
profit motive conflicts with the goals of
economic security and equity. Do you agree or
disagree? Why or why not?
Some might argue that the profit motive does
conflict with those goals, pointing out that
business owners, in their drive for profits, may
be less than fair. Others may argue that there is
no conflict, because the drive for profits
eventually leads to economic success for all.
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Chapter Assessment 14
Thinking Critically (cont.)
Understanding Cause and Effect How can the
movement of people and the communication of ideas
affect the type of economic system a society has?
Freedom of movement of people and ideas is the
hallmark of a market economy. Lack of movement is
a tendency of traditional and command economies.
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62
Chapter Assessment 15
Thinking Critically (cont.)
Making Inferences What incentive does owning
private property give people?
Private property gives people the incentive to
work harder, to save, to invest, and to succeed.
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63
Chapter Assessment 16
Thinking Critically (cont.)
Making Comparisons Reproduce the diagram on page
55 of your textbook. Then, in the spaces
indicated, identify several elements of command
and tradition in the U.S. economy that make it a
mixed, or modified private enterprise, economy.
Answers will vary.
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64
Chapter Assessment 17
Applying Economic Skills
Tradition Most people tip for service in
restaurants, but not for service at clothing
stores or gas stations. Explain how this
illustrates economic behavior by tradition rather
than by market or command.
Tipping for service in a restaurant is a
long-established tradition, just as tipping at
clothing stores and gas stations is rarely done.
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65
Chapter Assessment 18
Applying Economic Skills (cont.)
Freedom and Equity Explain the role you as a
consumer must play in obtaining economic equity
for yourself.
reporting unfair pricing or false advertising
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66
Chapter Assessment 19
Applying Economic Skills (cont.)
Voluntary Exchange How does the principle of
voluntary exchange operate in a market economy?
Both buyers and sellers must believe that
something they want has more value than the money
or products they want to give up.
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67
Chapter Assessment 20
Identify the type of economy in the following
situations (1) After hearing complaints about
postal service, Jack starts a delivery service.
(2) Production has remained the same for
generations. (3) A proposal to introduce new
production methods is held up for months while
paperwork is prepared.
market traditional command
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