# What Are The Characteristics Of A Free Enterprise System

By | June 17, 2023

What Are The Characteristics Of A Free Enterprise System – How does free enterprise answer the three economic questions? In a free enterprise economy, business firms will produce goods that consumers want to buy. For example, General Motors and Ford Motor Company decide what style and type of cars they will make based on what they think car buyers want to buy. Individuals who own and manage businesses decide how products will be produced.

2 Free enterprise Five characteristics of free enterprise Free enterprise has five main characteristics: private property, choice, free exchange, competition and economic incentives. Personal property can be described as any type of goods owned by a private person or company, such as a car, house or appliance. Any product owned by the government is considered public property.

## What Are The Characteristics Of A Free Enterprise System

Laws, institutions and regulations Free enterprise exists in many countries and the economic situation can vary from country to country. Legal systems and institutions can both facilitate and hinder free enterprise. 4

## How To Implement The Balanced Scorecard Framework (with Examples)

5 The Cycle Much of what characterizes a free enterprise economy has to do with how key sectors of the economy – government, businesses and households – work together. A household is defined as an economic unit consisting of one or more individuals who sell resources and buy goods and services.

Households buy goods from companies and sell resources to companies. Both companies and households pay taxes to the government. Both companies and households receive benefits from the state.

Profit and Loss Profit is the amount left after all production costs have been paid. Profit exists when total revenue is greater than total cost. A loss occurs when total costs are greater than total revenue.

9 Suppose you sell 10 CD players at \$100 each for a total profit of \$1,000. If it costs you an average of \$70 each to produce these CD players, the total cost of producing 10 CD players will be \$700. Do you have a profit or loss on the sale of 10 CD players? (Answer: You show a profit because your total revenue of \$1,000 is greater than your total expenses of \$700.)

#### Characteristics Of Free Enterprise

Profits and Losses as “Signals” In a free enterprise economy, some firms make a profit and others make a loss. Profit and loss are signals for companies that are actually making a profit or taking a loss, as well as signals for companies that are on the sidelines.

A firm can stop producing a loss-making product and reallocate its resources to a profitable product. Resources flow to profit and loss.

Cost of training = \$10 Quantity sold = 50 TR = ? \$10 x 50 = \$500 Average cost = \$5 Number sold = 20 TC = ? \$5 x 20 = \$100

Ethics and Free Enterprise Ethics consists of principles of behavior such as right and wrong, morality and immorality, and good and bad.

### The Basic Principles Of Free Enterprise

14 Free enterprise is considered a moral system because individuals are allowed to choose their own jobs and professions. Free enterprise allows the production of goods and services preferred by both the minority and the majority

15 A moral economy would reward producers for responding to buyers. Sellers who do not respond to the public face losses and go out of business. Proponents of free enterprise argue that no economic system can be ethical if it restricts people’s freedom.

The Bill of Rights states that “[shall] not be transferred to public use without just compensation.” The Declaration of Independence listed claims against Great Britain. One complaint is that the king prevented the colonies from “trading with all parts of the world.”

17 The US Constitution states that “Articles exported from any State shall not be subjected to taxes or duties.” It is important to allow free trade of goods across borders.

## What Is A First World (aka Developed Or Industrialized) Country?

People in a free enterprise economy generally share three sets of rights and responsibilities: 1. Public disclosure. The right to sell comes with the responsibility to disclose important facts about the relevant products.

19 2. Implementation of laws. A person has the right to use private property as he wishes and within the limits of the law. 3. To be truthful. The responsibility that comes with the right to compete is to compete truthfully, legally.

Imagine yourself as an entrepreneur. An entrepreneur is a person who has a special ability to find and exploit new business opportunities. Entrepreneurs play an important role in society by taking risks to develop new products or new ways of doing things that benefit society. 20

People won’t risk their time and money to develop new products if they can’t possibly make a profit. Not all entrepreneurs are successful. However, some of them become millionaires and even billionaires, and it is the prospect of such success that motivates entrepreneurs.

## Solution: Entrepreneurial Mind

CHAPTER 3: CHAPTER 5 The role of the government in free trade government as a contracting party A contract is an agreement between two or more people to do something. Could a free enterprise system work without a government to enforce contracts? Probably not so good, because the risk of starting a business would be too high.

Goods are divided into two main types: private goods and public goods. A special product is a product where one person’s consumption is subtracted from another person’s consumption. Examples include food and gas. A public good is a product where one person’s consumption does not subtract from another person’s consumption. An example is a movie in a cinema.

An excludable public good is a public good whose consumption by individuals can be excluded (physically prohibited). An example would be a university lecture which is only available to students enrolled in the university. A non-excludable public good is a public good that individuals cannot be excluded from consuming.

Who wants to produce a non-excludable public good? Economists say no one will want that in a free enterprise system. After all, people will not pay for what they get. However, even in a free enterprise economy, people do not want to exclude public goods such as land defense or flood protection (dams). Who will produce these products? The state will provide non-excludable public goods and pay taxes for them. 26

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27 If the government produces these products, how can the public tell what products are produced? American citizens have the right to vote, and they can influence what the government does by exercising that right. 27

28 Externalities There are two types of externalities: negative externalities and positive externalities. A negative externality is a harmful side effect of an action that is experienced by others. A positive externality is a positive side effect of an action that is experienced by others.