Free Enterprise Economy: Definition & Examples

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  • 0:01 What Is a Free…
  • 0:44 Features
  • 2:41 Goals
  • 3:59 Example
  • 4:35 Lesson Summary
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Lesson Transcript
Instructor: Ashley Johns

Ashley has taught college business courses and has a master's degree in management.

Our economic system has a major impact on how society functions. It determines how we feel and how we act. They say, 'Money makes the world go round.' Let's take a look at the free enterprise economy and see why that is.

What Is a Free Enterprise Economy?

You walk into the local shopping mall and look around at all the choices. You decide you want to buy a new pair of pants but aren't sure where you want to go. Looking at the map you see twenty different options. Wow! Maybe you should start with a cup of coffee…now you have three options for coffee. There are signs with promotions on them for new products and low prices. You remember your economics teacher telling you that competition is part of a free enterprise economy. This must be what he meant.

A free enterprise economy is an economic system with few government restrictions on business activities and ownership. The goal of the system is for businesses to have more freedom from government intervention.

Features

The freedoms can be seen through various features of the free enterprise system. Let's take a look at those features.

  • Own private property - This feature is seen as one of the most important freedoms. Think of yourself playing Monopoly, the Parker Brother's board game. The goal is to own all the properties. This gives you power. It is what you do with that power that makes the difference.
  • Enter into contracts - Business owners are able to enter into contracts with others in a free enterprise system. This could be a vendor contracting with another company to come in weekly and change the floor mats, or provide employee uniforms, or furnish a business loan to start the company.
  • Make personal choices - The free enterprise system allows the business owner to make decisions. They decide what companies they want as suppliers, what prices they'll charge consumers, and what benefits they'll offer employees. The decisions are impacted by others, but are still at the owner's discretion.
  • Engage in free enterprise and competition - Competition is a feature that helps regulate behavior and distribute wealth.
  • Self-interest - Business owners are motivated by profit. To gain ground over the competition, companies are forced to take steps to meet the needs of the consumer. This keeps the government from having to put regulations in place to protect the needs of the consumer. However, critics say consumers are often not protected. They point to recalls and product related injuries as evidence.
  • Minimal government interference - This feature is in place to minimize regulations that reduce efficiency. If one company gains control of an industry, you have a monopoly. This decreases consumer options and increases prices. In this instance, the government will intervene and break up the monopoly. But the goal of the free enterprise system is to limit such intervention so that the government acts as a rule enforcer, rather than being directly involved in economic activity.

Goals

To function properly, every system must have goals. The free enterprise has six goals. Let's take a look at each:

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