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Chapter 18, Lesson 3. Capitalism and Free Enterprise. The American market economy is huge. It accounts for about 1/5 of all the economic activity in the world! One of the things that has made this possible is capitalism.

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chapter 18 lesson 3

Chapter 18, Lesson 3

Capitalism and Free Enterprise

capitalism in the united states

The American market economy is huge.

  • It accounts for about 1/5 of all the economic activity in the world!
  • One of the things that has made this possible is capitalism.
  • Capitalism: an economic system in which private citizens own and decide how to use the factors of production in order to make money
  • Our system is also called a free enterprise economy.
  • Free Enterprise: an economic system in which individuals and groups have the freedom to start businesses with little government interference
Capitalism in the United States
economic freedom

In the United States, we place a high value on the freedom to make our own economic decisions.

  • People are free to buy and sell land, labor, and capital as well as to become entrepreneurs.
  • Workers have the freedom to sell their labor, meaning that they can decide what jobs they will do as well as how to spend the money they earn.
  • These freedoms allow the marketplace to adapt quickly to changing economic conditions.
Economic Freedom

Buyers and sellers exchange goods and services for money in markets.

  • 2 forces are at work in these exchanges: demand and supply.
  • In a free enterprise system, the buyers and sellers themselves make decisions about what is supplied and what is demanded.
  • The government does not tell producers what to make or consumers what to purchase.
  • Also, by encouraging competition, markets establish prices, and therefore do not need the involvement of the government.
voluntary exchange

The activity that takes place in markets is known to economists as voluntary exchange.

  • Voluntary Exchange: the act of buyers and sellers freely and willingly choosing to take part in marketplace transactions.
  • These transactions are the buying and selling of goods and services.
  • For instance, if you got 2 copies of the same game for Christmas, and your friend really wants it, you can sell it to him.
  • Both buyer and seller benefit
Voluntary Exchange
the profit motive

In a capitalist economy, people risk their savings by investing in businesses, whether their own or someone else’s.

  • The risk, of course, is that the business might not succeed, but if it does, investors can earn great rewards.
  • People take risks in the hope of making a profit.
  • Profit: the amount of money left over from the sale of goods and services after all the costs of production have been paid
  • The profit motive is the desire to earn money by creating and selling goods and services.
  • The profit motive pushes people to think of new and improved goods and services and leads people to imagine new, more productive ways of making and supplying those goods and services.
The Profit Motive

Starting a business does not ensure success.

  • In fact, capitalism thrives on competition – the struggle among businesses with similar products to attract consumers.
  • The most efficient producers sell goods at lower prices which attract buyers.
  • If other producers cannot improve their productivity or offer a better-quality product, they might be forced out of business.
  • Competition leads to greater efficiency, higher-quality products, and more satisfied customers.
private property rights

Under capitalism, people and businesses have private property rights.

  • This means they have the freedom to own and use their property as they wish.
  • Remember, this doesn’t just include land, but anything that you can take ownership of.
  • They can even choose to dispose of, or get rid of, that property.
  • Private property rights give Americans the incentive, or drive, to work, save, and invest because we can keep any gains that we earn.
  • People also tend to take better care of things that they own!
Private Property Rights
the origins of u s capitalism

In 1776 Adam Smith published a book called The Wealth of Nations which is considered to be the foundation of our economic system.

  • He argued that in order for society to advance, people have to be able to work for their own self-interest, meaning that people need to be allowed to try to make money how they best see fit.
  • He also introduced the idea of laissez-faire economics (hands-off economics), meaning that the government should not interfere in the marketplace.
The Origins of U.S. Capitalism