How Does Free Enterprise Allocate

Resource?

Profit

Profit is the money left over after the costs of producing a good or service have been subtracted from the revenue gained by selling that good or service.

Producers Seek Profits

Example: Coffee shop owners are motivated by the desire to earn profits.

Coffee producers charge the highest price consumers are willing to pay.

What is something worth? Motivated by profit, other producers enter the

coffee business. The profit seeking of producers, then, has helped in the allocation of resources.

Consumers Vote with Their Wallets

When consumers choose to buy a product, the are “voting” for their choice against competing products.

These “votes” help determine what will be produced in the future.

Example: Low-carb foods.

High-Carb FoodsProduct Unit Sales, 2003

(in millions)Percentage Change

Over 2002Instant Rice 79.1 -8.2Bulk Rice 180.2 -4.9Cookies 1,839.7 -5.5Regular Carbonated Soda

7,032.5 -5.9

Dry Pasta 1,227.0 -4.6White Bread 1,606.1 -4.7

Low-Carb/High-Protein FoodsProduct Unit Sales, 2003

(in millions)Percentage Change

Over 2002Frozen Meat/Seafood 483.5 +7.7Meat Snacks 105.4 +7.6

Nuts 679.3 +8.8Diet Carbonated Drinks

2,828.6 +1.0

Cheese 3,424.0 +4.0Wheat Bread 873.1 +4.0

Modified Free Enterprise Economy

A mixed economy that includes some government protections, provisions, and regulations to adjust the free enterprise system.

The United States, though bases on the market system, is mixed. Government is an important element in the American economic system, but its role is relatively limited.

Government in the Circular Flow Model