The Free Enterprise System
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THE FREE ENTERPRISE SYSTEM Chapter 5 MARKET-ORIENTED ECONOMIC SYSTEMS Section 5.1 OBJECTIVES 1. Explain the characteristics of a free enterprise system 2. Distinguish between price and nonprice competition 3. Explain the theory of supply and demand KEY TERMS Directions: On a separate sheet of paper, using the book, record the definitions for each of the key terms listed below Free enterprise system Nonprice competition Patent Monopoly Trademark Business risk Copyright Profit Competition Supply Price competition Demand BASIC PRINCIPLES In the United States we have: The freedom to elect the people who represent us in our government The freedom to make decisions about where we work The freedom to choose how we spend our money Workers have freedom to organize and negotiate with business, as part of a labor union Consumers have freedom to purchase goods and services Consumers have freedom to invest money in banks or businesses The Basis of a Free Enterprise System The freedom to own personal property The freedom to compete The freedom to take risks The freedom to make a profit BASIC PRINCIPLES Free Enterprise System Encourages individuals to start and operate their own businesses in a competitive system, without government involvement. The marketplace determines prices through the interaction of supply and demand Modified in the United States The government does intervene in business on a limited basis To protect citizens, while supporting principles of free enterprise BASIC PRINCIPLES Freedom of Ownership Under free enterprise system, individuals are free to own personal property Cars Computers Homes Natural resources Oil Land Able to buy anything you want as long as it’s not prohibited by law Able to do what you want with your property Give it away Lease it Sell it Use it for yourself FREEDOM OF OWNERSHIP Business Ownership The free enterprise system encourages individuals to own businesses Entrepreneurs Investors Intellectual Property Rights Protected in a free enterprise system Patents Trademarks Copyrights Trade secrets INTELLECTUAL PROPERTY RIGHTS Patent You own the rights to that item or idea Apply for a patent in the U.S. Patent and Trademark Office Allows the exclusive rights to make, use, or sell that intervention for up to 20 years During this time, anyone who wanted to manufacture your product would have to pay you for its use through a licensing agreement Trademark A word, name, symbol, sound, or color that identifies a good or service Cannot be used by anyone but the owner Can be renewed forever, if its being used by a business INTELLECTUAL PROPERTY RIGHTS Copyright Involves anything that is authored by an individual Writings (books, magazine articles, etc.) Music Artwork Gives the author the exclusive right to reproduce or sell the work Valid for the life of the author plus 70 years Trade Secret Information that a company keeps and protects for its use only, but is not patented. INTELLECTUAL PROPERTY RIGHTS When a company wants to use another’s name, symbol, creative work, or product, it must get permission to do so and pay a fee for the use A licensing agreement protects the originator’s name and products. COMPETITION Businesses that operate in a free enterprise system try to attract new customers and keep old ones. Other businesses try to take those same customers away. This struggle for customers is called competition Competition Means by which the free enterprise system functions to benefit customers Forces businesses to produce better-quality goods and services at reasonable prices Results in a wider selection of products from which to choose Increase in the nation’s output of goods and services Increase in the nation’s standard of living Two basic strategies Price competition Nonprice competition PRICE AND NONPRICE COMPETITION Price Competition Focuses on the sale of a product The assumption is that all things being equal, consumers will buy the products that are lowest in price Marketing strategies used by Wal-mart and Southwest Airlines are examples of price competition Wal-mart – “Always Low Prices. Always.” Southwest – “Low Fares.” Companies that run sales and offer rebates also use price competition PRICE AND NONPRICE COMPETITION Nonprice Competition Businesses choose to compete on the basis of factors that are not related to price Quality of the products Service Financing Business location Reputation May charge more for products than competitors Nonprice competition in advertising stress a company’s: Reliability Tradition Superior know-how Special services MONOPOLIES Monopoly No competition exists and one firm controls the market for a given product Exclusive control over a product or the means of producing it Prevented in a free enterprise system because they prevent competition A company can charge whatever it wants without competition Can also control the quality of a product and who gets it There is nothing to stop a company from acting without regard to customer wants and needs MONOPOLIES Risk Business risk is the potential for loss or failure As the potential for earnings gets greater, so does the risk Profit The money earned from conducting business after all costs and expenses have been paid The motivation for taking the risk of starting a business The potential reward for taking that risk The reward for satisfying the needs and wants of customers and consumers Encourages people to develop new products and services Without it, few new products would be introduced Encourages companies to work in an efficient way that helps to conserve precious human and natural resources Provide money for a company to keep its facilities and machinery up-to-date ECONOMIC COST OF UNPROFITABLE FIRMS An unprofitable business faces many problems Lay off employees Increase in unemployment Increase in social service programs Investors lose money Pay less money to the government in taxes ECONOMIC BENEFITS OF SUCCESSFUL FIRMS Profitable businesses hire more people Employees may have higher incomes, better benefits, and higher morale Investors earn money from their investments, which they spend or reinvest As employment and profits climb, the government makes more money from taxation of individuals and businesses Companies and individuals are more likely to donate to charities Profitable companies attract competition Beneficial to consumers Encourages new products, the lowest prices, the highest quality, and the best service Increases demand SUPPLY AND DEMAND In a market-oriented economy, supply and demand determine the prices and quantities of goods and services produced Supply The amount of goods producers are willing to make and sell Law of Supply Price and quantity supplied move in the same direction As price rises for a good, the quantity supplied generally rises As price falls, the quantity supplied by sellers also falls Suppliers want to supply a larger quantity of goods at higher prices so their businesses can be more profitable SUPPLY AND DEMAND In a market-oriented economy, supply and demand determine the prices and quantities of goods and services produced Demand Consumer willingness and ability to buy products Law of Demand Price and demand move in opposite directions As the price of a good increases, the quantity of the good demanded falls As the price falls, demand for the good increases SUPPLY AND DEMAND When supply and demand interact in the marketplace, conditions of surplus, shortage and equilibrium are created These conditions often determine whether prices will go down, go up, or stay the same SUPPLY AND DEMAND Surpluses Occur when supply exceeds demand Businesses run sales and offer discounts Shortages Occur when demand exceeds supply Businesses raise prices and still sell their merchandise Equilibrium The amount of a product being supplied is equal to the amount being demanded Supply and demand are balanced Customers are able to purchase goods and services at a fair price Retailers experience a steady flow of business SECTION 5.1 QUESTIONS 1. Provide an example of how freedom of ownership may be limited by government. 2. What are intellectual property rights and how does the law protect these rights? 3. In supply and demand theory, when is equilibrium achieved? 4. A discount retailer reported a profit of $93 million on sales of $4.6 billion. What percentage of sales was its profit? 5. If a local barber shop increased its price for a hair cut from $20 to $40, what might happen to demand for that service? What should happen if the opposite occurred – if the price was reduced from $20 to $10? What other factors could influence consumer demand in these situations? BUSINESS OPPORTUNITIES Section 5.2 OBJECTIVES Compare for-profit and nonprofit organizations Distinguish between the public and private sectors List the major types of businesses in the industrial market KEY TERMS Directions: On a separate sheet of paper, using the book, record the definitions for each of the key terms listed below Domestic business Derived demand Global business Wholesalers For-profit business Retailers Nonprofit business Production Public sector Management Private sector Finance Industry Accounting TYPES OF BUSINESS A business can be classified by it’s: Size and Scope Purpose Place within the industry Size and Scope Large vs. Small A small business is one that is operated by only a few individuals Generally has fewer than 100 employees A large business is usually one that employs more than 1,000 people About 95% of all U.S. businesses are classified as small businesses Employ more than half of the private sector (non-government) workforce TYPES OF BUSINESS Size and Scope Domestic vs. Global A business that sells its products only in it’s own country is considered a domestic business Opportunities for growth are limited to customers only within that country A global business sells its products in more than one country Internet makes it easier to do business globally TYPES OF BUSINESS Purpose For-Profit Business Seeks to make a profit from its operations Nonprofit Business Functions like a business but uses the money it makes to fund the cause identified in its charter Generate revenue through gifts and donations Usually do not have to pay taxes on their income They have expenses TYPES OF BUSINESS Public vs. Private Other organizations operate like businesses but are not intended to earn a profit Most local, state, and federal government agencies and services Public schools Public libraries Main purpose is to provide service to the people in the country or community in which they operate Government financed agencies are part of the public sector Businesses not associated with government agencies are part of the private sector. Public sector organizations purchase one-third of all goods and services sold in the United States each year TYPES OF BUSINESS Industry and Markets An industry consists of a group of establishments primarily engaged in producing or handling the same product or group of products or in rendering the same services. NAICS North American Industry Classification System United States, Canada, and Mexico It states that “establishments that do similar things in similar ways are classified together.” Uses six digit hierarchical coding system to classify all economic activity into 20 industry sectors Information sector includes industries involved in communications, publishing, and motion pictures as well as Internet companies. Information is helpful to businesses looking for new marketing opportunities Helpful to individuals who may want to find employment or invest in those sectors TYPES OF BUSINESS Consumer, Industrial, and Service Markets Review Consumer Markets: customers who want to buy goods and services for personal use Industrial Markets: business customers who buy goods for use in their operations Derived Demand In the industrial market is based on, or derived from, the demand for consumer goods and services Industrial companies look for opportunities to increase their business by studying consumer trends Service-related businesses function in both consumer and industrial markets Wholesalers Obtain goods from manufacturers and resell them to industrial users, other wholesalers, and retailers. Also called distributors Retailers Buy goods from wholesalers or directly from manufacturers and resell them to the consumer Retailers cater to the consumer market TYPES OF BUSINESS Consumer, Industrial, and Service Markets Service-Related Businesses Companies that provide intangible products to satisfy needs and wants of consumers and/or businesses. Consumer services include Dry cleaning Hair styling Entertainment Transportation Insurance Lawn-cutting Child care Housekeeping THE FUNCTIONS OF BUSINESS Four main functions involved in all business operations Production Marketing Management Finance THE FUNCTIONS OF BUSINESS Production The process of creating, expanding, manufacturing, or improving on goods and services In the SWOT analysis look for: Innovation Speed to market Efficiency Level of success with products Law of Diminishing Returns This principle states that if one factor of production is increased while the others remain the same, overall returns will decrease after a certain point Efficiency helps to keep prices down and sales up, which makes for a profitable company THE FUNCTIONS OF BUSINESS Production Procurement Involves buying and reselling goods that have already been produced Retail Wholesale SWOT Analysis, Wholesalers, and Retailers In a SWOT analysis, you would evaluate wholesalers and retailers on their merchandising ability The Five “Rights” of Merchandising The right of goods At the right time In the right place At the right place In the right moment THE FUNCTIONS OF BUSINESS Marketing The Role of Marketing Activities All related marketing activities support the buying and selling functions Product Place Price Promotion THE FUNCTIONS OF BUSINESS Management The process of achieving company goals by effective use of resources through planning, organizing, and controlling Planning involves establishing company objectives and forming strategies to meet objectives Organizing involves specific operations Scheduling employees Delegating responsibilities Maintaining records Controlling has to do with overseeing and analyzing operating budgets to suggest the most cost-effective measures for a company to follow Analysis of financial reports A SWOT analysis would evaluate the personnel who run a company THE FUNCTIONS OF BUSINESS Finance And Accounting Finance The function of business that involves money management Accounting Is the discipline that keeps track of a company’s financial situation Balance sheet Reports a company’s assets, liabilities, and owner’s equity Liabilities represent money owed by a business to its creditors Profit and loss statement Reflects the ongoing operations Income from sales revenue and investments Costs and expenses of doing business Cash flow statements SECTION 5.2 QUESTIONS 1. Of what significance are small businesses to the U.S. economy? 2. Why would DECA, an international association of marketing students, be classified as a nonprofit organization? 3. What information is reported in a company’s balance sheet? In its profit and loss statement? 4. Determine the net worth (owner’s equity) of a company that has assets of $500,000 and liabilities of $200,000.
