EC15 Student Handout Objective A

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New York University *

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Economics

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Feb 20, 2024

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Private Enterprise Every society develops a system for making decisions about how it will use its resources to meet the needs and wants of its people. Each of these economic systems must answer these three basic questions: 1. What goods and services will be produced? 2. How will these goods and services be produced? 3. For whom will these goods and services be produced? In a private enterprise economic system, these questions are answered by individuals and businesses, not by the government. Individuals and groups (rather than the government) own or control the economic resources—human and natural resources and capital goods—used to produce goods and services. Throughout the history of the United States, private enterprise has enabled the nation to produce more goods and services than any other single country. This success is due to the characteristics of the private enterprise system. Let’s take a look at each of these characteristics. Freedom in the marketplace While you may think of a “marketplace” as a specific location, in economic terms it refers to any place where the buying and/or selling of goods and services occurs. Private enterprise is often called a market economy , or a market system , because markets, not the government, answer the economic questions of what, how, and for whom to produce. The markets in private enterprise are self-regulated and self-controlled. In other words, these businesses are free to choose such things as:  What they wish to produce  Which resources to purchase  What techniques of production to use  How their goods or services will be marketed  What price(s) they will charge  When to close down or go out of business At the same time, consumers may purchase anything that can legally be sold as long as they are able to pay for it. Each time a consumer makes a purchase, s/he is casting an economic vote in the marketplace. These economic votes enable consumers to control what will be produced. In the long run, if consumers don’t buy a product, the producer must change it, replace it, or go out of business. For example, if an automobile manufacturer designs a new car that does not appeal to drivers, the car will not sell. If a movie studio makes a film that the public doesn’t like, the film will LAP-EC-015-CS ©2019, MBA Research and Curriculum Center® People Power 1

not make money. In either case, the product must be replaced by something consumers do like if the producer wants to make a profit and stay in business. It is the responsibility of consumers to be well informed and to make educated choices in the marketplace so that producers will continue to make good products at fair prices. Recently, U.S. automakers have drifted away from producing sedans, as customers are more interested in SUVs, crossovers, and trucks. American carmakers cannot compete with the sedans made by international companies such as Honda and Toyota. Read more about this shift in the marketplace here: https://www.consumerreports.org/general-motors/gm-to-drop-some-sedans/ . Private property Anything of value that people own is considered private property . It may be business property or personal property. It may be in such forms as land, furniture, buildings, resources, jewelry, money, equipment, clothing, or stocks. Ownership of private property also includes ownership of the results of your work. More examples of private property include:  Farmers’ ownership of the crops they raise  Workers’ ownership of the wages they earn  Businesses’ ownership of the goods or services they produce  Individuals’ ownership of the profit that comes from the sale of private property Individuals and businesses in a private enterprise economy are free to decide how to use their private property and when and how to sell it. They can:  Enter freely into contracts involving their private property  Stop others from using their private property  Abuse their private property as long as they are not stepping on the rights of others  Control their private property in any way they choose  Use their private property to make income  Keep any income earned by renting, leasing, or selling their private property Limited government control The private enterprise system that exists in the United States is not a pure private enterprise system because there is a limited amount of government control. This private enterprise system is considered a mixed system —individuals and businesses are the primary economic decision makers, while government helps regulate and control the system. Want to know more about mixed economic systems? Check out the video "What Is a Mixed Economy?" by Mr. Sinn: https://www.youtube.com/watch?v=9EseSEgLsvU . In the United States, the government steps in only to protect citizens; otherwise, it lets them LAP-EC-015-CS ©2019, MBA Research and Curriculum Center® People Power 2

pursue their own goals. Think of the government as a referee, ensuring that individuals and businesses play according to the rules. However, as life in the U.S. has become more complex, the role of government has gradually expanded. This has happened partly because Americans want the government to solve certain problems, such as inflation, pollution, health care, and unemployment. Competition Have you ever thought about how many different ways a certain product can be produced? For example, books can be printed on different kinds of paper, using a variety of styles of type, bound with hard or paperback covers, and sold at high, medium, or low prices. They are produced as e- books that you can read on your e-reader, computer, or phone, or audiobooks you can listen to on your phone. Since there are so many different ways to produce many products, the company that finds the most efficient way is the one that will be able to compete successfully. Competition is a rivalry between two or more businesses to attract scarce customer dollars. Therefore, a business must obtain and use resources efficiently. This will help the company keep its prices competitive with those of other firms. Other ways in which businesses compete for customers are by giving better credit options than those offered by rival companies, improving goods and services, creating new goods and services, and providing better service than their competitors. The profit motive Profit is the monetary reward business owners receive in return for taking the risk involved in starting a business. The desire to make a profit, called the profit motive , forms the economic basis for the private enterprise system. If a business did not make a profit, it would eventually cease to exist. The freedom to use your private property to make a profit is as important as the freedom to own private property in the first place. Profit serves as a motive, or reason, for starting a business and as a goal toward which the individual or the business can work. Individuals and businesses in private enterprise can keep any profit they earn, or they can use it in any way they wish. For this reason, many people consider making a profit the greatest motivating factor in the private enterprise system. Check out this video “Going Places” about the profit motive: https://www.youtube.com/watch? v=OesP-6IUnmM . It might be a bit retro (okay, it’s from 1948!), but while times may change, the profit motive doesn’t. The price-directed system A private enterprise economy is often called a price-directed system because price determines what consumers buy, which jobs they will take, the success or failure of businesses, and the types of products that will be produced. Prices are important in making the system work correctly. LAP-EC-015-CS ©2019, MBA Research and Curriculum Center® People Power 3

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Supply and demand work together to determine prices in a private enterprise system. Consumers indicate their demand for products by the prices they are willing to pay for them. For example, when banana purchasers demand more bananas than are being supplied, the price of bananas will rise. If the price rises too high, some consumers will buy fewer bananas. The supply might then exceed the demand, causing the price to fall. Weaknesses of the system While the U.S. private enterprise system is the most productive that the world has ever known, it does have some negative aspects, or disadvantages. There are times when production drops because sales are low. When this happens, companies may lay off workers or even go out of business. This results in periods of unemployment. Also, poverty has not been eliminated. There are still many people in the United States and in other countries with private enterprise systems who are not able to afford the basic necessities of life. Property and income are not distributed equally in a private enterprise system. Some people own a great deal of property while others own little or none because they do not have the money to buy it. The private enterprise system does not always make it easy for people to increase their income, especially if they do not have access to higher education, training, and skills. Curious to read more about the disadvantages of the market system? Check out “The Disadvantages of Capitalism in the Economic System” by Liz Gold: https://bizfluent.com/info- 8401627-disadvantages-capitalism-economic-system.html . Summary In a private enterprise economic system, individuals and groups (rather than the government) own or control the economic resources. Characteristics of a private enterprise system include freedom in the marketplace, private property, limited government control, competition, the profit motive, and the price-directed system. Disadvantages of private enterprise include periods of unemployment, poverty, and unequal distribution of wealth. LAP-EC-015-CS ©2019, MBA Research and Curriculum Center® People Power 4

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