The Free Enterprise
Chapter 5.1
2.3 Analyze the Free Enterprise
Our Basic Economic Freedoms
• Freedom of Ownership
– Personal Items, businesses, private property,
Intellectual property
• Freedom to Compete
• Freedom to Take a Risk
• Freedom to Make a Profit
– Profit is the driving motive in our economy
Intellectual Property Rights
• Patent: Invention for up to 20 years
• Trademark: word, name, symbol or color
identifying a business or product – life of
business
• Copyright: writings, music, artwork for life
of author plus 70 years
Competition
• Struggle between companies for
customers
• Benefits:
– Lower Prices
– Better Quality
Two Types of Competition
PRICE
Focuses on the sale
price of a product
NONPRICE
Compete on the basis of
factors not related to
price
- services
- location
- reputation, etc.
Monopoly
• There is no competition and one firm
controls the market for a given product.
• Gives exclusive control over a product or
means of production
– Microsoft = Technology dominance
• NOT LEGAL IN A DEMOCRACY
– Exception = utilities
Risk = Profit
• Risk = The potential for loss or failure.
– Money, investments, reputation,
– 85% of new product fail in first year!
• You must take risk in order to earn profit
• Profit is the money earned after all costs and
expenses have been paid.
– 1-5% of sales
• Profit provides the incentive for a person to
take risk.
How are prices determined in our
market place?
The interaction of Supply and
Demand!
2.6 Evaluate the relationship of
cost/profit to supply/demand
Law of Demand
DEMAND: consumers’ willingness and
ability to buy products
The lower prices create higher demand;
higher prices have a lower demand
Exception to the Law: Diminishing Marginal
Utility: Consumers will buy just so much
of a given product
Elasticity of Demand (2 types)
• Elastic Demand – Slight change in $ price $
= creates a LARGE change in demand
– Products are items of WANT, not in urgent
need, substitutes are available
• Inelastic Demand – Changes in $price$ =
creates very little change in demand
– Products are necessities, in urgent need, have
no available substitutes
Law of Supply
SUPPLY: The amount of goods producers
are willing to make and sell
At higher prices, producers will offer a
large quantity of products for sale; at
lower prices, producers offer fewer
products for sale
Supply and Demand Theory
Terms to know!
• Equilibrium: The point at which Supply
and Demand are equal
– The goal!!
• Surplus: Supply exceeds Demand; Prices
will typically lower to reach demand
(equilibrium)
• Shortage: Demand exceeds Supply; Prices
will generally rise until producers can meet
the demand (equilibrium)