Explore free enterprise systems. Learn the definition of a free enterprise system and understand its characteristics. Discover various free enterprise examples.
Updated: 11/21/2023
Free Enterprise System Definition, Characteristics & Examples
Table of Contents
- What is a Free Enterprise System?
- How a Free Enterprise System Works
- Free Enterprise System Characteristics
- Free Enterprise Examples
- Lesson Summary
- FAQs
- Activities
Free Enterprise System - An Essay Prompt:
The following exercise is designed to enable students to apply their knowledge of the Free Enterprise System in a real-life context.
Scenario:
You are an economist working for a large research agency. Your manager has a new assignment for you that you are eager to get started. In the past decade or so, Rwanda, an African country, has introduced extensive economic reforms. This is attracting a lot of attention from both foreign investors and western governments. Some experts have stated that Rwanda may indeed become the economic motor of the African continent. This would be quite an accomplishment for a country that was torn apart by civil war and a terrible genocide just 25 years ago. The question on everyone's mind is, "Is Rwanda the best example of the free enterprise system in Africa?"
Essay Prompt:
Perform online research on the economic development and reforms in Rwanda since the mid-2000s. In a short format essay of at least 150 words, explain how the country's new economic policies are in line (or not) with the characteristics of the free enterprise system presented in your lesson. Note that you must discuss at least two out of the five characteristics.
What is an example of free enterprise?
An example of free enterprise is deciding to establish a new online business. In a free enterprise system, individuals have the freedom to establish new businesses and determine how to operate them.
What is a free enterprise system?
A free enterprise system refers to an economic system where the government places minimal restrictions and regulations. Operations are influenced by demand and supply, not the government.
Table of Contents
- What is a Free Enterprise System?
- How a Free Enterprise System Works
- Free Enterprise System Characteristics
- Free Enterprise Examples
- Lesson Summary
The free enterprise system definition is the economic model where the government exerts minimal control and restrictions on the economy. What is a free enterprise economy? A free enterprise economy explains the system where the government places very few restrictions on the operations of the economy regarding production, investment, and distribution. When the government does not place many restrictions on the economy, the economic operations are influenced by supply and demand. Due to the economic freedom portrayed in the free enterprise system, the system is also known as a free market system.
A free enterprise system is also associated with capitalism because a capitalist system entails the economic system where the private sector owns and operates the property. The prices of commodities in capitalism are influenced by demand and supply forces and not by the government through restrictions. Therefore, the free enterprise system does not depict the centralization of market authority that exists in a command or planned economy. The free enterprise system allows business entities and consumers of commodities to control the marketplace's operation.
Therefore, there is the freedom to choose what to buy, and for business owners, there is the freedom to determine the type of business to open and operate. A free enterprise system has competitors because several businesses operate in the same industry and set prices for their commodities and services. Therefore, businesses in this system have to be conscious of their rivals so that they do not allow them to have a competitive advantage over them.
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Just as the free enterprise system definition explains it, the system works by allowing consumers to have the liberty to compare the various options of the commodities they seek to purchase based on the prices at which business owners sell them. Business owners also have the freedom to determine the business to venture into and the prices to charge their products and services. Through all these, the government applies minimal influence on how the businesses operate, the pricing of their commodities, and how consumers purchase the commodities.
In a free enterprise system, the consumers have the liberty to determine how to use their money by choosing the products and services to choose from in the market and the sellers that sell to them. The free enterprise system is unlike the socialist economic system, where the government directly influences business operations by placing many restrictions on their operations. In a socialist system, the government regulates the economy by influencing what consumers can purchase in the market, the kind of employment workers can get employed in, and limiting entrepreneurship or who can own a business.
A free enterprise system is characterized by variations where the level of economic freedom varies in markets. Some governments place very minimal restrictions on the operations of the economy, while others exert restrictions when necessary. For instance, a government can regulate the market by influencing the level of borrowing, determining the consumption of resources in the economy, and influencing taxes by changing the levels and types.
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A free enterprise system depicts several characteristics concerning its freedom in the market, consumer participation in the market, and the minimal influence of the government on the economy. The characteristics answer the question 'what is a free enterprise system?' by explaining what it consists of. The characteristics are:
- Consumer spending and preferences influence business decisions. Consumers in a free enterprise system influence business decisions by determining the kind of products and services businesses provide because they consume the products and services, enabling businesses to generate profits. Consumers also determine what to spend their money on and the businesses from which to access services and products.
- Business owners have the liberty to set prices. Businesses produce commodities in the free enterprise system and hence set the prices of their commodities towards making profits. Businesses are geared toward maximizing profits and not making losses and hence determine the prices of commodities based on the costs incurred. The price at which they charge the commodities should be higher than the costs incurred for the business to make a profit.
- Individuals can buy land and building under minimal restrictions. The government in a free enterprise exerts minimal restrictions on the acquisition of land and buildings so that people can purchase them at the prices set by the sellers, which grants people the right to private property.
- Business owners choose their business partners and suppliers. In a free enterprise system, businesses can choose who to supply commodities to them or who to outsource services.
- Individuals can choose where to work and for who. Individuals in a free enterprise system have the liberty to choose the employment of their choice. They also choose the industry in which to work.
- Businesses are driven by making profits. The establishment of businesses in a free enterprise system is geared towards making profits from the production and sale of products. The business entities incur costs in the production process of a commodity. Therefore, they set prices above the costs so that the difference between the price and the cost incurred is the profit amount.
- Competition amongst producers. Since there are no regulations on establishing new businesses in a free enterprise system, competition exists because of many entrepreneurs. Businesses providing similar commodities compete to gain a competitive advantage over their rivals. Competition is economically healthy as it encourages innovation which enhances overall economic productivity.
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Free enterprise examples are depicted in exercising and maximizing freedom in the free enterprise system. Some of the examples of free enterprise are:
- Starting an online business. Starting an online business depicts the freedom in a free enterprise system to establish new businesses and determine how they operate. The system does not limit individuals from establishing new businesses and determining how they operate. Individuals can choose whether to have their business operating from a physical stall or online. Either way, the goal of the business owner is to generate profits.
- Venturing into a career of interest. An individual's venture into a career of their choice portrays the trait of a free enterprise system to allow individuals to determine the employment of their choice. For example, an individual may choose to pursue journalism because it is their career of interest. The individual also has the freedom to choose who can employ them because there may be many employers due to the minimal restriction on establishing new businesses.
- Opening a coffee shop. The opening of a coffee shop depicts the characteristic of a free enterprise to allow individuals to open a business and satisfy consumer wants. An individual may open a coffee shop in a learning institution where learners have morning classes. The learners may have limited time to prepare themselves for a morning class and prepare breakfast. Therefore, a coffee shop would satisfy the need of many learners before or after attending a class. The establishment of more businesses in the economy promotes growth and development due to more competitors, translating to increased innovation.
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A free enterprise system defines the model of an economy where the government places minimal restrictions on how businesses operate and the involvement and participation of individuals in the economy. The system is often termed a free market system because the government exerts minimal or no regulations to influence the economy's business operations. The free enterprise system is also associated with the capitalist system, which provides private property ownership. Its market is influenced by supply and demand, not government regulations and restrictions. The capitalist system is unlike the socialist system, where the latter is centrally organized and influenced by the government, and property is not privately owned.
A free enterprise system is characterized by the ability of people to purchase land and buildings with minimal government intervention. Business owners have the liberty to set prices to generate profits. Business owners can also determine who to do business with regarding the suppliers or who to outsource from. Additionally, business decisions are influenced by consumer spending and preferences because consumers decide where to purchase a commodity and how much to spend. Examples of a free enterprise system include individuals pursuing a career based on their self-interests, establishing an online business, and opening a coffee shop.
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Video Transcript
What is a Free Enterprise System?
Do you realize that you are experiencing a free enterprise system every time you spend money buying goods and services in the United States? The price that you pay, the types of goods that you can purchase, where you shop, and the customer service experience that you get are all largely driven by business owners who make free decisions about how to operate their business.
A free enterprise system is an economic system where a government places very few restrictions on the types of business activities or ownership in which citizens participate. This type of system is often referred to by others as a free market, or capitalism. In a free enterprise system, you are allowed to spend your money in the way you want. You often have several different companies competing for your business, which often leads to lower prices and better-quality products. You are also free to pursue any type of job or work that you enjoy. How would you feel if someone told you exactly what you had to do for a living?
There are countries around the world that do not have a free enterprise system. Socialist governments, those that directly manage their nation's social and economic affairs, often direct what kind of work people have to do and also limit the opportunity for many people to own businesses. As a result, these countries also limit what you can purchase. Can you imagine only having one phone carrier to purchase plans or phones from? How about having only one cable television provider that told you what channels you could watch? Part of the reason those in the U.S. do not face this situation is because of the free enterprise system.
It is important to note that free enterprise systems can vary and differ in how 'free' they actually are. The United States and Singapore are two examples of countries that reflect the most free enterprise systems. Many European countries are also considered free enterprise markets, but often have more government regulations and involvement in business transactions when considered necessary.
Characteristics of Free Enterprise
In general, a free enterprise system usually has the following traits or characteristics:
- Consumer preferences and spending, not the government, drive what types of products and services companies offer.
- The government allows you to choose any type of business or field that you are interested in owning or seeking employment.
- The market allows you to buy land, buildings, and property with very few restrictions.
- As a business owner, you have the right to set your own prices and determine your own profit levels.
- As a business owner, you have the ability to choose suppliers and other people you do business with.
Free Enterprise in Action
Examples of free enterprise in action include:
- Opening a coffee shop - The coffee lover is free to open his or her own business in a free enterprise system. Coffee owners can not only choose to open a store, but they can decide what types of coffees to offer, how much to sell the drinks for, the hours they want to be open, and where they want to locate the business. Many of these things could be limited or denied in a socialist country that does not promote a free enterprise market.
- Starting an online business - Maybe you always wanted to start an online business selling crafts that you make at home. The good news is that since you live in a free enterprise system, you can do it! You may have to purchase a business license and perform a few other administrative tasks to satisfy local requirements, but for the most part, you can start looking for ways to build your website and post your products for sale online right away!
- Becoming a doctor, lawyer, teacher, or social worker - Pursuing a line of work that interests you and how you want to earn a living are all allowed in a free enterprise system. The government cannot set limits on allowed occupations nor can they set specific social classes of which you must be a part.
Lesson Summary
A free enterprise system is an economic system where a government places very few restrictions on the types of business activities or ownership that citizens want to engage in. This type of system is often called a free market, or capitalist system. Free enterprise countries usually have strong competition among businesses and allow citizens to purchase land and buildings, set their own prices, and choose who they want to do business with. Consumer preferences and spending habits are the main drivers of business decisions, not government policies and intervention. Your decision to open a coffee shop, start an online business, or choose to become a doctor are all examples of a free enterprise system at work.
Key Terms
 |
- Free enterprise system: economic system in which a government places very few restrictions on the types of business activities or ownership that citizens want to engage in or operate under (also known as a free market or capitalism system)
- Socialist governments: governments that directly manage their nation's social and economic affairs, direct the kind of work people do and provide limited opportunities for people to own businesses
Learning Outcomes
Take the opportunity to achieve these objectives after finishing the lesson on the free enterprise system:
- Tell what happens in a free enterprise system
- Note the characteristics of these systems
- Provide examples of free enterprise systems
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Free Enterprise System Definition, Characteristics & Examples
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