Question

In a free enterprise economy, prices are determined by supply and demand. How is the price of an item affected if the supply goes down?

Answer 1

The U.S. economic system is largely capitalistic. Another name for capitalism is free enterprise. Free enterprise is based on a principle known as the free market system. In economics, a market is business carried on between buyers and sellers.

In the free market system, prices help decide what, how, and for whom to produce. Self-interest, profits, competition, and the right to own private property are the key factors in free enterprise and the free market system.

Self-interest is the single, most powerful force in the U.S. economy. Consumers, or the people who buy goods and services, shop for the best possible goods at the lowest prices. Producers look for ways to make the largest possible profits. Their search often leads them to invent better products and to develop the most efficient ways to produce them. High profits may encourage producers to expand their businesses. That growth will make more goods available to consumers and provide more jobs for workers.

Competition has a similar effect. Because producers must compete with one another, each business tries to keep the quality of its goods high and prices low so that consumers will choose its products over others on the market. Consumers, in turn, get a broad choice of products to buy.

The U.S. economic system also protects the right to own private property. Private property includes factories and stores as well as people’s homes.

Under free enterprise, the U.S. government makes no central plan for the nation’s economy as the Communist government in the former Soviet Union once did. However, the government does make laws and regulations that limit the freedoms of private business owners. The minimum wage, for example, is a government regulation.

The government also produces certain kinds of goods and services. The postal system, local schools, and city bus lines are all government sponsored. The purpose of these government regulations and services is to keep the country running more smoothly.
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