American Free American Free EnterpriseEnterprise

Chapter 3Chapter 3

Macroeconomics vs. Macroeconomics vs. MicroeconomicsMicroeconomics

Land of OpportunityLand of Opportunity

Why has America been such an economic success?Why has America been such an economic success? Land, natural resources, and flow of immigration with various Land, natural resources, and flow of immigration with various

skillsskills Protection of American enterpriseProtection of American enterprise

Constitutional ProtectionConstitutional Protection Property Rights – 5Property Rights – 5thth Amendment & 14 Amendment & 14thth Amendment (1868) Amendment (1868) Taxation- Taxation-

Article I of the Constitution – Can impose taxesArticle I of the Constitution – Can impose taxes Section 2 & 9 – apportioned according to the population so that Section 2 & 9 – apportioned according to the population so that

everyone will pay same amounteveryone will pay same amount 1616thth Amendment (1913) – set taxes based on income Amendment (1913) – set taxes based on income Enforceable Contracts – Constitution guarantees that individuals or Enforceable Contracts – Constitution guarantees that individuals or

businesses cannot use the political process to get excused from businesses cannot use the political process to get excused from contracts. No legislature can pass a law changing the terms of contracts. No legislature can pass a law changing the terms of someone’s business agreementsomeone’s business agreement

Basic Principles of Free Basic Principles of Free EnterpriseEnterprise Profit MotiveProfit Motive

Driven by desire for profit; incentive that leads Driven by desire for profit; incentive that leads entrepreneurs to accept risk of business failureentrepreneurs to accept risk of business failure

Forces management to exercise financial discipline Forces management to exercise financial discipline because it makes people economically responsible because it makes people economically responsible for their own success and failure.for their own success and failure.

Rewards innovation by letting creative companies Rewards innovation by letting creative companies grow and improves productivity by allowing more grow and improves productivity by allowing more efficient companies to make more moneyefficient companies to make more money

Open OpportunityOpen Opportunity Concept that everyone can compete in the Concept that everyone can compete in the

marketplace; different people and different marketplace; different people and different outcomesoutcomes

Economic RightsEconomic Rights Legal EqualityLegal Equality

Everyone has same legal rights & everyone can compete in the Everyone has same legal rights & everyone can compete in the economy marketplaceeconomy marketplace

We maximize our human capitalWe maximize our human capital Those countries that limit the legal rights of women and minorities are Those countries that limit the legal rights of women and minorities are

missing out on the productive potential of a large portion of their missing out on the productive potential of a large portion of their societysociety

Private Property RightsPrivate Property Rights People have the right to control their belongings as they see fit.People have the right to control their belongings as they see fit.

Free ContractFree Contract Allows people the freedom to decide who to enter a contract withAllows people the freedom to decide who to enter a contract with

Voluntary ExchangeVoluntary Exchange People have right to decide what and when to buy and sellPeople have right to decide what and when to buy and sell

CompetitionCompetition Because of all the above rights we have competition, which Because of all the above rights we have competition, which

benefits the consumers with lower prices and higher quality goodsbenefits the consumers with lower prices and higher quality goods

Role of Consumer

Our purchases act as signal to the Our purchases act as signal to the producers to tell them what to sell producers to tell them what to sell and how much to makeand how much to make

Consumers also let their wishes Consumers also let their wishes known by joining known by joining interest groupsinterest groups Interest Groups –private organization Interest Groups –private organization

that tries to persuade public officials to that tries to persuade public officials to act or vote according to the interests of act or vote according to the interests of the group’s membersthe group’s members

Role of GovernmentRole of Government Information & Free EnterpriseInformation & Free Enterprise

Educated consumers will help free market run Educated consumers will help free market run more efficientlymore efficiently

Public Disclosure Laws –required to give info about Public Disclosure Laws –required to give info about productsproducts

Example: Fuel efficiency labels on cars & energy efficiency Example: Fuel efficiency labels on cars & energy efficiency labels on air conditionerslabels on air conditioners

Protecting Health, Safety, and Well-beingProtecting Health, Safety, and Well-being Government imposes some basic restrictionsGovernment imposes some basic restrictions

Environmental protection rulesEnvironmental protection rules Example: Gas stations, zoning laws, food and medicine Example: Gas stations, zoning laws, food and medicine

Public Interest- things that concern the general publicPublic Interest- things that concern the general public Negative Effects of RegulationNegative Effects of Regulation

Costly to implement rules and regulations, which Costly to implement rules and regulations, which slows growth, and jacks up the prices of goods, slows growth, and jacks up the prices of goods, also raised government spendingalso raised government spending

Look to page 55 for a list of relatively new agencies Look to page 55 for a list of relatively new agencies createdcreated

Is the Economy Sick?Is the Economy Sick?

GDP – total value of all final goods and GDP – total value of all final goods and services produced in an economyservices produced in an economy Help economists predict business cyclesHelp economists predict business cycles Business cycle – period of growth followed by a Business cycle – period of growth followed by a

period of decline (recession)period of decline (recession) Cycles are major changes not just day to day ups Cycles are major changes not just day to day ups

and downs of the marketand downs of the market Some cycles last less than a year while others could Some cycles last less than a year while others could

last yearslast years U.S. – We aren’t completely a free market. The gov’t U.S. – We aren’t completely a free market. The gov’t

tries to prevent huge swings in economic behaviortries to prevent huge swings in economic behavior How does the government do that?How does the government do that?

Business CyclesBusiness Cycles

What does this mean to What does this mean to me?me?

Where we are in a given business Where we are in a given business cycle affects your daily lifecycle affects your daily life High school graduatesHigh school graduates Inability to buy what we need because Inability to buy what we need because

prices increase but incomes don’tprices increase but incomes don’t

What should we do?What should we do? There’s no immediate or simply “easy” buttonThere’s no immediate or simply “easy” button Policymakers use 3 main ways to stabilize the Policymakers use 3 main ways to stabilize the

economy:economy:1.1. EmploymentEmployment

Goal to provide jobs for everyone able to workGoal to provide jobs for everyone able to work Unemployment rate between 4-6% is okayUnemployment rate between 4-6% is okay

Current unemployment rate is: 8.1%Current unemployment rate is: 8.1% In Michigan: 12%In Michigan: 12%

2.2. Growth Growth Standard of LivingStandard of Living

3.3. StabilityStabilityCreate economic confidence in economy and our financial Create economic confidence in economy and our financial

institutionsinstitutions Indicators: prices- either direction can hurt which can set off a Indicators: prices- either direction can hurt which can set off a

chain reactionchain reaction For example: price of gas or milkFor example: price of gas or milk

Keep the banks open, ensured, and money flowingKeep the banks open, ensured, and money flowing Interest Rates- Why are they so important?Interest Rates- Why are they so important?

Ways to Create GrowthWays to Create Growth

TechnologyTechnology For example the invention of the light bulb For example the invention of the light bulb

(1879)(1879) Because of technology some things may reusedBecause of technology some things may reused

Government’s RoleGovernment’s Role Federal agencies fund many grants for research Federal agencies fund many grants for research

and development projectsand development projects Morrill Acts of 1862 and 1890 –land grantsMorrill Acts of 1862 and 1890 –land grants NASANASA Patents (20 year permit) and Copyrights - can sell workPatents (20 year permit) and Copyrights - can sell work

Providing Public GoodsProviding Public Goods

Public Goods- a shared good or service for Public Goods- a shared good or service for which it would be inefficient or impractical which it would be inefficient or impractical to make people pay individually or to to make people pay individually or to exclude non taxpayersexclude non taxpayers

1.1. Mount Rushmore cleaning or space shuttle Mount Rushmore cleaning or space shuttle launch bill?launch bill?

2.2. Basic services should be available to all- Basic services should be available to all- (example: highways)(example: highways)

Public vs. Private SectorPublic vs. Private Sector Public sector means the government paysPublic sector means the government pays Private sector involves individuals and businessesPrivate sector involves individuals and businesses

ExternalitiesExternalities

Economic side effect of a good or Economic side effect of a good or service other than to the person service other than to the person deciding how much to produce or deciding how much to produce or consumeconsume Externalities can be positive or negativeExternalities can be positive or negative

+ Externalities = American Axle hires + Externalities = American Axle hires underprivileged teenagers and trains them to underprivileged teenagers and trains them to work in offices or buying the house across the work in offices or buying the house across the streetstreet

- Externalities = chemical waste or bachelor - Externalities = chemical waste or bachelor neighborneighbor

Providing a Safety NetProviding a Safety Net Because of uneven distribution of wealthBecause of uneven distribution of wealth

Detroit?Detroit? Poverty Threshold - income level below that Poverty Threshold - income level below that

which is needed to support families or which is needed to support families or householdshouseholds Determined by federal governmentDetermined by federal government 2000 – single parent under age 65 with one child is 2000 – single parent under age 65 with one child is

$11,869; 4 person family is was $17,463$11,869; 4 person family is was $17,463 Detroit - $35,025Detroit - $35,025

Government’s RoleGovernment’s Role

Welfare – Government aid to the Welfare – Government aid to the poorpoor History – FDR during Great Depression History – FDR during Great Depression

and expanded in 1960’s under LBJ “War and expanded in 1960’s under LBJ “War on Poverty”on Poverty”

Critics – dependence and discourages Critics – dependence and discourages productivity thus enabling povertyproductivity thus enabling poverty

Redistribution ProgramsRedistribution Programs Social SecuritySocial Security

1935- elderly lost life savings and couldn’t survive1935- elderly lost life savings and couldn’t survive Elderly and disabledElderly and disabled Collects payroll taxes from current workers and Collects payroll taxes from current workers and

redistributes that money to current recipientsredistributes that money to current recipients Unemployment insuranceUnemployment insurance

Funded jointly by state and federal government Funded jointly by state and federal government Must show that they’ve tried to get a jobMust show that they’ve tried to get a job

Worker’s CompensationWorker’s Compensation Cash help to those hurt on the jobCash help to those hurt on the job Employers pay insurance to cover any future Employers pay insurance to cover any future

claims that employees may makeclaims that employees may make

In-kind benefitsIn-kind benefits Goods and services provided for free or at greatly Goods and services provided for free or at greatly

reduced pricesreduced prices Examples: food stamps, subsidized housing, legal aidExamples: food stamps, subsidized housing, legal aid

Medical BenefitsMedical Benefits Medicare - U.S. provided medical benefits to the elderly Medicare - U.S. provided medical benefits to the elderly

over age 65over age 65 Medicaid – provided to the poor Medicaid – provided to the poor

EducationEducation Student AidStudent Aid Positive – add to the nation’s human capital and labor Positive – add to the nation’s human capital and labor

productivityproductivity Faith Based InitiativesFaith Based Initiatives

Non government sources of charityNon government sources of charity G.W. Bush initiative in 2001; established Office of Faith G.W. Bush initiative in 2001; established Office of Faith

Based and Community Initiatives Based and Community Initiatives Public funding for charitable activities Public funding for charitable activities

InflationInflation

General increase in pricesGeneral increase in prices Higher prices mean you can Higher prices mean you can

purchase less for the same incomepurchase less for the same income While many people are hurt by While many people are hurt by

inflation, especially when its inflation, especially when its unexpected, others may benefitunexpected, others may benefit Let’s take a lookLet’s take a look

Who’s been most hurt by Who’s been most hurt by inflation?inflation?

Directions: Directions: Did the following gain or were they hurt by inflation? Did the following gain or were they hurt by inflation? ExplainExplain

Priscilla “Homeowner and worker”Priscilla “Homeowner and worker” MayorMayor Peter “Store Owner”Peter “Store Owner” Elmer “RetiredElmer “Retired Mr. Sad Class “Teacher”Mr. Sad Class “Teacher” Lucy “High School Senior”Lucy “High School Senior” Helga “Retiree”Helga “Retiree”