Chapter 28
Our free enterprise system
Free Enterprise System
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Also called a market economy or capitalism
Producers and Consumers are free to engage in
business transactions with minimal government
interference.
Producers- are the manufacturers or makers of goods
and services for sale
Consumers are the buyers and users of goods and
services.
Everyone is a consumer because we all use goods and
services.
Scarcity
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Wants are unlimited however the resources for
producing the products to satisfy these wants are
limited. This basic economic problem is called
scarcity.
A country’s economic system determines what
products its businesses will produce with its limited
resources
To make a profit- producers must provide goods and
services that consumers will buy
Scarcity
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As an individual consumer, you have limited resources.
You must decide what to buy with your limited
money to achieve the greatest satisfaction or utility.
Your spending decisions and those of other
consumers determine which products will succeed
and which will fail and leave the market
Supply and Demand
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Supply is the quantity of goods and services that
producers are willing and able to provide.
Demand is the willingness and ability of consumers to
purchase goods and services at certain prices.
Supply and Demand
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Increased demand creates a situation in which the
supply of the product is not sufficient to satisfy all
consumers who want to buy it. As a result, producers
can raise their prices
The high prices bring large profits to the producers
Large profits prompt current producers to make
more of the product and attract other producers to
start providing the product, increasing the supply.
Supply and Demand
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Supply then exceeds demand and consumers can pick and
choose. In order to entice consumers to buy their product
instead of their competitors’, producers reduce their prices
Reducing prices in turn, lowers profits, and producers begin to
produce less
Eventually the product reaches its EQUILIBRIUM PRICE. This
is the price at which the quantity supplied equals the quantity
demanded of the product. At this price, there is just enough of
the product available for all consumers who want to buy it.
Consumers
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Consumers have the ultimate power in a free enterprise
system. Consumers determine what is produced and at
what price. Collectively, consumer buying decisions direct
the production of goods and services.
Producers
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Producers also have power in a free enterprise
system, because they can employ various techniques
to influence consumer buying decisions. They use
advertising and other marketing strategies to try to
increase demand for their products.
You must understand the role of advertising and
other marketing strategies on our economic system
and become a careful consumer
Free Enterprise System
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Three basic conditions exist for a free enterprise system
to function smoothly
Competition
Purchasing Power
Informed Consumers
When these three are in place, the best possible product
are produced, at the highest quality and at the best price.
Illegal Business Practices
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Illegal business practices can reduce competition and
result in higher prices.
Price Fixing is an illegal agreement among
competitors to sell a good or service for a set price.
There is no real competition because prices have
been predetermined or fixed.
It prevents the forces of supply and demand from
determining prices freely in the marketplace, it
impedes free enterprise and the government
Purchasing Power
For free enterprise to operate, citizens must have
the ability to buy.
Purchasing power is the value of money, measured in
the amount of goods and services that it can buy.
In periods of inflation, when prices are generally
rising in the economy, purchasing power
decreases.
Purchasing power also declines during periods of
recession. People who lose their jobs or have
their wages reduced cannot buy as many goods.
Transfer Payments
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The government also shifts purchasing power among
citizens by making transfer payments.
Transfer payments are government grants to some
citizens paid with money collected from other
citizens, generally through taxes.
For the receivers, transfer payments are unearned
income.
This provides purchasing power for needy people.
Welfare, Social Security and Veteran Benefits are all
transfer payments.
Deceptive Practices
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Consumers must educate themselves to recognize
a potential fraud before they become victims.
Bait and Switch: illegal sales technique in which a
seller advertises a product with the intention of
persuading consumers to buy a more expensive
product.
The bait is the bargain product that gets
customers into the store.
Switch- is when the salesperson switches them to
a more expensive product.
Deceptive Practices: Fake Sale
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Educated consumers are the best way to protect
consumers against deceptive practices.
Fake Sale: the most common of all consumer fraud. A
merchant advertises a big sale but keeps the items at
regular price or make the price tags look like a price
reduction when there actually is none.
Deceptive Practices:Lowballing
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Low balling: advertising a service at an unusually
low price to lure customers, and then attempting
to persuade them that they need additional
services.
For example a repair shop may offer special on
brake realigning. But when the mechanics inspect
the brakes, they find several other “necessary”
repairs.
To protect yourself: state that you want no repairs
other than those agreed upon unless the repair
shop informs you of the additional cost ahead of
time and you choose to authorize the extra
repairs.
Pyramid Schemes
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Mostly illegal multilevel marketing plans that promise
distributors commissions from their own sales and
those of other distributors they recruit. A cash
investment of some kind is usually required to
become a distributors. But despite their claims to
have legitimate products or services to sell, these
fraudsters simply use money coming in from new
recruits to pay off early stage investors.
http://www.sec.gov/answers/pyramid.htm
Pyramid
Schemes
But eventually the
pyramid will
collapse. At some
point the schemes
get too big, the
promoter cannot
raise enough
money from new
investors to pay
earlier investors,
and many people
lose their money.
Multilevel Marketing Businesses
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Some are well run businesses (Tupperware parties,
Pampered Chef, Thirty-One, Partylite, etc.)
If you get involved, as long as your main goal is selling a
product, then you are probably ok.
Deceptive Schemes: Pigeon Drop
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Pigeon drop refers to any method used by experienced
con artists to convince vulnerable people to invest in
phony investments, swampland real estate, or other
swindles. The pigeon is the unsuspecting consumer. Con
artists often target trusting people who know little of
such scams but do have a source of money
Other types of Fraud
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Door to door solicitors
Health claims (miracle pills)
Infomercials-guarantee claims are exaggerated
Internet Fraud
Telemarketing Fraud
Responsible Consumer
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Be suspicious
Become educated before buying products
Food Drug and Cosmetics Act of 1938 requires
truthful labeling on these products as well as includes
the weight or volume of contents.
Other labeling acts have followed.
Responsible Consumer
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Read labels
Check containers carefully
Read contracts
Keep receipts and warranties
Ask for references
Be loyal
Check up on businesses
Wait a day for a major purchase
Smart Shopping
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Be aware of prices
Shop around
Understand sale terminology
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10 for 10
Coupons
Rebates: attractive but 40% never get redeemed
Plan your purchases
Avoid impulse buying
Compute unit prices
Compute total cost
Smart Shopping
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10 for $10 doesn’t mean you have to buy 10 to get the
sale price
Bargain/Haggling—some stores will let you!
Store brands or generics cost less than name brands but
use same ingredients
Report Fraud
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Consumer protection agencies are available at many
levels:
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Local: St. Louis Better Business Bureau
State: Missouri Attorney General
Federal: Federal Trade Commission
You can report suspicions of fraud by email, phone or in
person to a consumer protection agency