Explanation:
If an economy has both capitalism and free markets, we say that the economy is based on free enterprise. A free enterprise economy has five important characteristics. They are economic freedom, voluntary willing exchange, private property rights, the profit motive, and competition.
Individual freedom is almost the same as the “economic freedom” described earlier, so in some ways
the two overlap. Economic freedom is both a trait and a benefit of capitalism. This is true of capitalism
in the United States. It is also true in other parts of the world, like Singapore and Northern Europe.
Capitalism and democracy are fairly strong in those places.
Our individual freedom shows in many different ways, from choices we make in the market to
choices we make in the voting booth. Strong and stable democracies are also found in countries with
free enterprise capitalism. It is not possible to have one without the other.
Freedom is something that we value every day, from the time we get up until the time we go to
bed. Many of the personal choices we make, such as the foods we buy and the jobs we do, would not
be possible without an economy based on free enterprise capitalism.
Capitalism thrives on competition—the struggle among sellers to attract the most consumers.
Competition is possible because businesses and entrepreneurs have the freedom to produce what they
think will be the most profitable. Free enterprise capitalism allows competition to thrive. This benefits
both producers and consumers.
Competition benefits consumers by ensuring that unpopular products will cease to be produced.
Competition also benefits consumers by ensuring that producers always work to bring newer, better,
and less expensive products to market.
Competition benefits the economy by ensuring that the most efficient producers of a product
survive, while the least efficient producers fail or try to produce different products. In a world of scarce
resources, competition helps to ensure that resources are used as efficiently as possible.
Market economies everywhere produce a huge variety of goods of almost all shapes, colors, and sizes.
Take shoes, for example. Whenever you go into a shoe store, you will find an amazing variety of colors,
styles, shapes, and sizes. If the store is big enough, there may be aisles and aisles of shoes, and the
variety of shoes changes from season to season. Go to a different store, and you might find different
brands, colors, and styles. All this is due to competition. But think how different things would be in a
different type of economy.
Under a command economy, as in the former Soviet Union, the central planners would solve the
the problem of shoe production in a different way. First, they would get an estimate of the number of
men, women, and children in the economy. Then they would decide how many pairs of shoes each
should buy in a year. The easiest thing is to make a small number of styles, in a limited number of
colors. The result, as far as the consumer was concerned, was a handful of styles that were produced
mostly in one color black.
Market economies adjust daily to change. The adjustment takes place mainly through the price
the system, and a change in the price of one product can affect changes in other industries. Consider the
the way the rising cost of oil on international markets has affected our economy. One of the main changes
has been increased gas mileage for new cars. Because there is a growing focus on fuel efficiency, car
makers have figured out how to improve mileage. More efficient gasoline engines and lighter weight
materials for car bodies have been developed. Some of the improvement is also due to extensive wind
tunnel testing to reduce wind drag.
Economists think of wealth as the build-up of products that are tangible, have utility, and are
transferable. The creation of wealth is exactly what happens when more and better products are
produced in a free market capitalistic system.
The United States’ Gross Domestic Product (GDP) (the dollar value of all final goods, services, and
structures produced within a country’s borders in a year) is the largest in the world. It is twice as large
as China’s GDP, even though China’s population is more than four times larger than the U.S. population.
