Free Enterprise System
In Introduction to Economics
Philosophy that our nation’s founders believe that
individuals should have the freedom of choice.
In theory, the free enterprise system encourages
individuals to start and operate their own
businesses without government involvement.
Competition
Struggle between companies for customers that is
both healthy and vital to out free enterprise system.
Price Competition
Focuses on the sale price of a product.
Non-price Competition
Businesses choose to compete on the basis
of factors that are not related to price.
Competition, cont.
Direct Competition
Product or brand which
competes in the same product
category.
Indirect Competition
A product that is in a different
category altogether but which
is seen as an alternative
purchase choice.
Competition, cont.
Monopoly
Exclusive control over a product or the means of
producing it.
Are Monopolies Fair?
Risk
The potential for loss or failure.
Profit
The money earned from conducting business after
al costs and expenses have been paid.
Economic Benefits of Successful Firms
Vs.
Economic Cost of Unprofitable Firms
The Role of Government:
1. Provide general services (fire, police, education)
2. Support business (SBA, loans for businesses)
3. Regulates business (worker, business protection)
4. Competes with small business (TVA, Mail, Amtrack)
The Role of Consumers:
1. Pick the winners
2. Determine how much demand
3. Keep it a customer oriented society
Economic Systems
System by which a nation decides how to
use its resources to produce and distribute
goods and services.
3 Basic Economic Questions:
What is produced?
How is it produced?
For whom is it produced for?
Economic Systems, cont.
By answering the 3 basic questions, you will fit into 1 of 2 categories.
Market Economy
No government involvement in economic
decisions.
Command Economy
The government answers the economic
questions.
What countries economies are a pure
market or pure command?
Mixed Economies
Capitalism
The economic market system characterized by
private ownership of businesses and marketplace
competition.
Socialist
Increased amount of government involvement in
order to reduce the differences between rich and
poor.
Communist
Totalitarian--that means that the government
runs everything.
Mixed Economy, cont.
Privatization
Process of selling
government-owned
business to private
individuals.
Factors of Production
Economist term for resources.
Capital
The money needed to start and
operate a business, which also
includes the goods used in the
production process.
Labor
All the people who work in the
economy.
Land
Refers to everything in its natural
state.
Entrepreneurhsip
Refers to the skills of the people who
are willing to risk their time and
money to run a business.
Production, cont.
Infrastructure
The physical
development of a
country, which
includes the roads,
ports, sanitation
facilities, and utilities.
Resources
All the things used in
producing goods and
services.
Scarcity
The difference between needs and wants, and
available resources.
Unlimited
Needs & Wants
Limited
Resources
Scarcity
Choices
What
How
For Whom
Economics Basics
Demand
Refers to consumer willingness and ability to buy products.
Supply
The amount of goods producers are willing to make and
sell.
Equilibrium
Exists when the amount of
product supplied is equal to
amount of product demanded.
Economics Basics, cont.
Surplus
Occurs when supply
exceeds demand.
Shortages
Occurs when demand
exceeds the supply.
The Demand Schedule and Demand
“Curve” for MP3 songs.
Demand curve
Demand schedule
The demand
curve slopes
downward
because of the
law of demand
$1.25
$1.00
Price
Price
$ 1.25
$ 1.00
$ 0.75
$ 0.50
$ 0.25
Quantity
Demanded
8
14
20
26
32
$0.75
$0.50
D
$0.25
$-
2
8
14
20
Quantity
26
32
The prices of related goods:
Substitutes and Complements
•
•
Substitutes are goods that
are related in such a way
that in increase in the
price of one good leads to
an increase in demand for
the other good
Complements are goods
that are related in such a
way that an increase in the
price of one leads to a
decrease in the demand
for the other
The Supply Schedule and Supply
“Curve” for MP3s
Supply curve
$1.25
S
$1.00
Price
Supply schedule
Quantity
Price
Supplied
$ 1.25
28
$ 1.00
24
$ 0.75
20
$ 0.50
16
$ 0.25
12
$0.75
$0.50
The supply curve
slopes upward
because of the
law of supply
$0.25
$8
12
16
20
Quantity
24
28
Changes in Supply
 Changes in supply can be
caused by changes in,




Technology
The prices of resources used
in production (input prices =
wages, interest, rent)
Producer expectations
The number of producers
Market equilibrium
“a snap shot”
P
D
S
In equilibrium,
the plans of
buyers match the
plans of sellers
Pe
a.k.a. the
market
clearing
price
Qe
Q
Market Schedules and Equilibrium
for MP3s
Price
$ 1.25
$ 1.00
$ 0.75
$ 0.50
$ 0.25
Quantity
Supplied
28
24
20
16
12
Market schedules
Quantity
Surplus or
Demanded
Shortage
8
Surplus of 20
14
Surplus of 10
20
Equilibrium
26
Shortage of 10
32
Shortage of 20
Price
Fall
Fall
Remain the same
Rise
Rise
Business Cycle
Reoccurring movement or changes in the economy
that goes through four stages:
Prosperity
Period of economic growth.
Recession
Period of economic slowdown.
Depression
Period of prolonged and deep recession.
Recovery
Period of renewed economic growth.
Productivity
The output per worker hour.
Gross Domestic Product (GDP)
The measure of the goods and service produced
using labor and property located in this country.
Gross National Product (GNP)
Everything produced by U.S. citizens here or
abroad.
Standard of Living
Measurement of the amount
of goods and services that a
nation’s people have.
Inflation
Rising Prices.
Consumer Price Index
(CPI)
Measures the change in
price over a time of some
400 specific goods and
services used by the
average urban household.