Marketing Ch. 3
Our Free Enterprise System
Basic Principles
• Free Enterprise System
– Individuals should have freedom of choice
– Encourages individuals to start and operate their
own business without government involvement.
Freedom of Ownership
• You have the right to own your own business
however there are some restrictions on how
and where those businesses may operate.
– Zoning laws
Competition
• Struggle between companies for customers
• Healthy and vital to our free enterprise system
– Help motivate people to improve themselves
– Forces businesses to produce better-quality goods
and services at a reasonable price.
• Develop new products and improve old ones
• Wider selection of a product to choose from
Two Basic ways Businesses Compete
1. Price Competition
2. NonPrice Competition
Price Competition
• Focuses on the sale of a product
• Assuming all things are equal – Customers will
purchases the product that has the lowest
price.
Nonprice Competition
• Businesses choice to compete on the basis of
factors that are not related to price
– Quality of product
– Service and financing
– Business location
– Reputation
– Qualifications and expertise of their personnel
Monopolies
• Exclusive control over a product or the means
to produce one.
• When there is no competition and one firm
controls the market
• Prohibited
Risk
• Risk is the potential for loss or failure
• Perceived in relation to the potential from
improved earnings
Profit
• Money earned from conducting business
after all costs and expense
• Provides the incentive for people to risk their
own money
• Profit for most businesses is 1-5% of sales
Economic Cost of Unprofitable Firms
• First thing they do is lay off employees
• Investors lose money if the value of their stock
falls below what they paid for it.
• Fewer resources
• Cuts back on research and development of
new products
• Government suffers because businesses pay
less taxes
• Unemployment ups the cost for social services
Economic Benefits of Successful Firm
• Hire more people and pay them well
• Investors earn money, which in turn they
spend or reinvest
• Vendors and Suppliers make more money
• Government receives more in individual and
business taxes
• Companies contribute more to charities
• Attract more competition
The Role of Government
• Government plays four roles in our free
enterprise system:
1.
2.
3.
4.
Provides general services
Supports businesses
Regulates businesses
Competes with private businesses
Provides general services
• Our government provides:
– Military
– Police and Fire protection
– Free public education
• Retraining for people who have lost their job
–Joint Training Partnership Act
– Builds and supports the building of roads and
bridges
Provides general services
• Our government provides:
– Public Library
– Social welfare system
– Medicare
• Elderly
– Medicaid
• Poor
Supporter of Business
• Supports business in times of crisis
– Government guaranteed loans to auto industry
• Disaster assistance
– Floods and earthquakes
• Small Business Administration (SBA)
– Provides counseling and educational materials to
prospective business owners to help insure
success
– Loan guarantees
– Establish trade alliances and agreements with
other countries
Regulator
• Make laws designed to protect the safety,
health, and welfare of individuals
• Consumer and Worker Protection
– Laws are carried out by regulatory agencies
• Food and Drug Administration (FDA)
• Equal Employment Opportunity Commission
(EEOC)
• Occupational Safety and Health Administration
(OSHA)
• Consumer Product Safety Commission (CPSC)
Regulator
• Consumer and Worker Protection
– Environmental Protection Agency (EPA)
– Local Zoning Ordinances to help protect the value
of residential real estate
– Securities and Exchange Commission (SEC)
• Licensing of brokerage firms and financial advisors
Regulator
• Consumer and Worker Protection
– State and local level
• Require licensing of people
• Health department
• Minimum wage
–$7.70
–Minimum wage flyer
Regulator
• Business Protection
– To protect our private property rights, governments
provides laws and regulation regarding:
• Patents
–Exclude other from making, using, and/or
selling the invention for 20 years
• Copyrights ©
– Giving creators of original work the exclusive rights to it for
Life of the author plus 50 years
• Trademarks
– Distinctive sign or indicator used by business organization
– Typically a word, slogan, symbol, design, or image
Regulator
• Business Protection
– To protect our private property rights, governments
provides laws and regulation regarding:
• Trademarks
– Distinctive sign or indicator used by business
organization
– Typically a word, slogan, symbol, design, or image
– Unregistered Trademarks ™
– Registered Trademarks ®
– They last indefinitely
Regulator
• Business Protection
– To protect our private property rights, governments
provides laws and regulation regarding:
• Licensing agreement
– Protects originators name and product
Regulator
• Business Protection
– Sherman Antitrust Act
• Prevents monopolies
• Outlaws all contracts and agreements that restrain free
trade or limits competition
– Clayton Antitrust Act
• Created the Federal Trade Commission (FTC)
• Included investigations of deceptive and misleading
business practices like false advertising
Regulator
• Business Protection
– Federal Reserve System
• Government monitors our economy and
controls our monetary supply
• When the economy is improving or moving to
slowly it reacts
–Prices going up to fast – Increase interest
rates
–Prices moving to slow – Decrease interest
rates
Competitors
• US government runs three business
operations:
– Tennessee Valley Authority
– U.S. Postal Service
– Amtrak
– Also run national parks and campgrounds
Role of the Consumer
• Consumers do two major things in the
marketplace
1. Pick the winner that will be in the marketplace
tomorrow
2. Determine how much demand there is for any
given product and helps determine prices
Deciding Which Businesses Survive
• Consumers decide which products will be
produced and which companies will stay in
business
– This is done by shopping
Determining Prices
• When supply and demand interact, they
create:
– Surplus – supply exceeds demand
– Shortages – Demand exceeds supply
– Equilibrium – Supply and demand equal