Marketing Essentials
n Chapter 3 The Free Enterprise System
Section 3.1 Capitalism
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
What You'll Learn
 Basic principles of a free enterprise system
 The role of competition
 The importance of risk and profit
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Why It's Important
In this chapter, you will develop an
understanding of how our economic
system operates. You will learn how
prices are determined, as well as what
roles the government and consumers
play in the free enterprise system.
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Key Terms
 free enterprise system
 competition
 price competition
 nonprice competition
 monopoly
 risk
 profit
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SECTION 3.1
Capitalism
Basic Principles
In the United States, we have the freedom
to make decisions about where we work
and how we spend our money.
A free enterprise system encourages
individuals to start and operate their own
businesses.
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Freedom of Ownership
Individuals in our free enterprise system are
free to own personal property, such as cars,
computers, and homes, as well as natural
resources such as oil and land. You can buy
anything you want as long as it is not
prohibited by law.
Slide 1 of 3
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Freedom of Ownership
In a free enterprise system people are
encouraged to own businesses, but there are
restrictions on how and where businesses may
operate.
 Businesses that make things may be
forced to comply with certain
environmental measures.
 Businesses may be restricted in where
they can locate.
Slide 2 of 3
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SECTION 3.1
Capitalism
Freedom of Ownership
If you get a patent on an invention, anyone
who wanted to manufacture your product
would have to pay you for its use through a
licensing agreement.
 Example: A T-shirt manufacturer gets a
licensing agreement with the NFL to
produce NFL logo T-shirts.
Slide 3 of 3
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SECTION 3.1
Capitalism
Competition
Competition is the struggle between
companies for customers. Competition is
an essential part of a free enterprise
system. It forces businesses to produce
better quality goods and services at
reasonable prices.
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Price Competition
Price competition focuses on the sale price
of a product. The assumption is that, all other
things being equal, consumers will buy the
products that are lowest in price.
 Example: Wal-Mart advertises
"Always the Lowest Price—Always."
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SECTION 3.1
Capitalism
Nonprice Competition
In nonprice competition, businesses
compete based on
 the quality of the products, service
and financing
 business location
 reputation
 the qualifications or expertise of
their personnel
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Monopolies
When there is no competition and one firm
controls the market for a given product, a
monopoly exists.
Monopolies are not permitted under a free
enterprise system because they prevent
competition.
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Risk
Risk is the potential for loss or failure in
relation to the potential for improved earnings.
As the potential for earnings gets greater,
so does the risk.
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Profit
Profit is the money earned from conducting
business after all costs and expenses have
been paid.
Profit is the engine that drives a free
enterprise system.
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Economic Cost of Unprofitable Firms
 Unprofitable businesses lay off employees.
 Their stock prices fall, so they have fewer
resources and investors lose money.
 They cut back on research and development.
 Their suppliers and transporters suffer.
 The government receives less in taxes and
pay more in social services.
Chapter 3 n The Free Enterprise System
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SECTION 3.1
Capitalism
Economic Benefits of Successful Firms
 Profitable businesses hire more people.
 Their investors earn from investing in the
company.
 Their vendors make more money.
 Companies and employees give more to
charities.
 The government receives more taxes.
 Competition benefits the consumer.
Chapter 3 n The Free Enterprise System
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Marketing Essentials
n Chapter 3 The Free Enterprise System
Section 3.2 Government and
Consumer Functions
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
What You'll Learn
 The roles government plays in our free
enterprise system
 Supply and demand theory
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Why It's Important
As a consumer, you need to
understand your power to affect the
prices you pay for products. As a
voter, you have a responsibility to
understand how decisions made by
the government affect you, your
investments,
and your life in general.
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Key Terms
 demand
 supply
 equilibrium
 surpluses
 shortages
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
The Role of Government
The United States is a modified free
enterprise system. In such a system, the
government acts as:
 provider of services
 supporter of business
 regulator
 competitor
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Provider of Services
To ensure the safety and general
welfare of people in the United
States, the government provides:
 military protection
 roads and bridges
 police protection
 public libraries
 fire protection
 welfare system
 free public education
 health care for the
elderly and poor
 job training
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Supporter of Business
 The government provides disaster assistance
to help both businesses and homeowners
rebuild after disasters.
 The Small Business Administration provides
counseling and educational materials to
support business.
 The government is the largest consumer of
goods and services in the U.S.
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Regulator
In the United States, most laws are
designed to protect the safety,
health, and welfare of individuals and
the freedom of businesses to operate
in our free enterprise economic
system.
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Regulator: Consumer
and Worker Protection
Slide 1 of 2
The government protects workers and
consumers through the following federal
agencies:
 Food and Drug Administration
(FDA)
 Equal Employment Opportunity
Commission (EEOC)
 Occupational Safety and Health
Administration (OSHA)
 Consumer Product Safety
Commission (CPSC) Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Regulator: Consumer
and Worker Protection
 Environmental Protection Agency (EPA)
 The Securities and Exchange
Commission (SEC)
Slide 2 of 2
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Regulator:
Business Protection
The government provides laws and
regulations regarding patents,
copyrights, and trademarks.
The government regulates trade with
other countries to protect national
security and
to protect U.S. companies from unfair
competition.
Slide 1 of 3
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Regulator:
Business Protection
The Sherman Antitrust Act, passed in
1890, outlawed monopolies in
business, protecting competition.
The Clayton Antitrust Act, passed in
1914, closed loopholes in the
Sherman Antitrust Act.
The Federal Trade Commission (FTC)
enforces both acts.
Slide 2 of 3
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Government as Regulator:
Business Protection
The Federal Reserve System is the
nation's banking system. The Federal
Reserve Board of Governors controls
interest rates, increasing or
decreasing rates to manipulate
economic activity and inflation.
Slide 3 of 3
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SECTION 3.2
Government and Consumer
Functions
Government as Competitor
The federal government runs three
businesses:
 Tennessee Valley Authority provides
electricity to the rural South
 U.S. Postal Service provides national
mail delivery
 Amtrak provides passenger rail service,
established under the Rail Passenger
Act of 1970.
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
The Role of the Consumer
Consumers do two major things in the
marketplace:
 They pick the winners—the products
and businesses that will be in the
marketplace tomorrow.
 They determine the demand for any
given product, and therefore help
determine prices.
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Deciding Which Businesses Survive
Consumers decide which businesses
will survive by "voting" with each
purchase.
The more votes (sales) a product gets,
the more likely that product or
company
will survive.
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Determining Prices
Prices in a free enterprise system are
determined by supply and demand.
Supply and demand interact to
determine the price customers are
willing to pay for
the number of products producers
are willing to make.
Slide 1 of 4
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Determining Prices
Demand refers to consumer willingness
and ability to buy products. According to
the law of demand, if the price is low
enough, demand for a product usually
increases.
Slide 2 of 4
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Determining Prices
Supply is the amount of goods
producers are willing to make and sell.
 higher prices = more products for sale
 lower prices = less products for sale
Slide 3 of 4
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Determining Prices
Equilibrium exists when the amount
of product supplied is equal to the
amount of product demanded.
Slide 4 of 4
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Surpluses
Surpluses of goods occur when supply
exceeds demand. When this happens,
businesses respond by lowering their
prices in order to encourage people to
buy more of the product.
 Example: When grocery stores
have lots of produce, they price
the produce low to encourage
people to buy.
Chapter 3 n The Free Enterprise System
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SECTION 3.2
Government and Consumer
Functions
Shortages
When demand exceeds supply,
shortages of products occur. When
shortages occur, businesses can
raise prices and still sell their
merchandise.
 Example: An oil shortage
increases the price of gasoline,
so consumers who want to drive
their vehicles pay the
higher price.
Chapter 3 n The Free Enterprise System
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3.2
Graphic Organizer
The Determinants of Demand
Existence
of
Substitutes
Prices of
Complimentary
Goods
Tastes
and
Preferences
Demand
Changes
in
Population
Income
Chapter 3 n The Free Enterprise System
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