CHAPTER 3

FREE ENTERPRISE ECONOMY

• Free Enterprise Economy: An Economic
system in which privately owned businesses
have the freedom to operate for a profit with
limited government intervention
• A free enterprise economy has both capitalism
and free markets.
• Characteristics of a capitalistic free enterprise
economy include economic freedom, voluntary
exchange, private property rights, the profit
motive, and competition.
• Economic freedom allows you to choose your
occupation, employer, and job location.
• Economic freedom is a characteristic of
capitalism.
• People can buy what they want and choose
their own occupation, employer, and job
location.
• Businesses can hire the workers of their
choice and produce what they want; they
are free to risk success or failure.
• Capitalism allows voluntary exchange
between buyers and sellers.
• Private property rights allow people to own
and control possessions, which gives them the
incentive to work, save, and invest.
• The profit motive is largely responsible for
the growth of a free enterprise system.
• Competition benefits both consumers and the
economy.
 Benefits of Free Enterprise
• Individual freedom is closely related to
economic freedom.
• Market economies produce a huge variety of
goods.
• Market economies adjust daily, mainly
through the ever-changing prices of goods and
services.
• Intense competition in a free market
capitalist economy promotes economic
progress in the form of a continuing supply
of newer and better products.
• When more and better products are
produced in a free market capitalistic
system, wealth is created.
 Disadvantages
• Periods of uneven economic growth are one of
the disadvantages of free enterprise capitalism.
• In free enterprise capitalism, the gaps between
rich and poor citizens seem to increase.
• In free enterprise economies, suppliers tend to
combine to avoid competition, which results in
fewer participants on the supply side of the
market.
• Businesses such as corporations have most of
the same rights as individuals, but they also
have many responsibilities as a result of
government-imposed regulations.
Economic freedom, voluntary exchange, private
property rights,competition, profit motive
 Role of Entrepreneur
• Entrepreneurs are important because they are willing to take
risks to start new businesses, so they become the catalyst of
the free enterprise economy.
• Most entrepreneurs fail, but some survive and a few even
become wealthy.
• Successful entrepreneurs attract other firms to the industry,
eventually leading to new products, greater competition,
more production, higher quality, and lower prices.
 Role of Consumer
• Consumers ultimately determine WHAT to
produce.
• The term consumer sovereignty reflects the idea
that the consumer rules the market.
• Consumers play an important role in the
American free enterprise economy because their
spending helps determine what is, and is not,
produced.
 Role of the Government
• Government has become involved in the
American free enterprise system because its
citizens want it that way.
• The government passes laws to help protect
citizens from false advertising, unsafe food
and drugs, environmental hazards, and unsafe
products.
• All levels of government provide goods and
services for citizens, including education,
highways, public welfare, and many others.
• The government regulates economic activity to
help preserve competition in the marketplace.
• The government spends more than all private
businesses combined, so it has become a huge
consumer in the marketplace.
 Mixed Economy
• In a mixed or modified free enterprise economy, people
and businesses carry out their economic affairs freely, but are
subject to some government intervention and regulation.
• The question of how much government involvement is
necessary is one of the great unsolved questions of our times.
• The American system is a mixed or modified free enterprise
economy because the majority of the people want it that way.