The Free Enterprise
System
S
Traits of Private Enterprise
S
Objectives
S Explain the characteristics of the free enterprise system.
S Distinguish between price and nonprice competition.
S Explain the theory of supply and demand.
The Main Idea
S Countries in the global marketplace have
market-oriented economic systems that feature
the traits of the free enterprise system:
competition, property ownership, risk, and
the profit motive.
Basic Principles
S Private enterprise is business ownership
by ordinary people, not the government.
S It is the basis of a market-oriented
economy. Private enterprise is also
known as free enterprise.
Basic Principles
Basic Elements of Private Enterprise
S Freedom to own property
S Freedom to compete
S Freedom to take risks
S Freedom to make a profit
Basic Principles
S People are encouraged to start and operate their own
businesses as a part of the free enterprise system.
S The marketplace determines prices through the
interaction of supply and demand. If the supply of a
product exceeds the demand, the price tends to drop. If
demand is greater than supply, the price tends to go up.
The government does not set prices or distribute goods
and services.
Ownership
S In the free enterprise system, people are free to
own property, such as cars, computers, and homes.
They can also own natural resources such as oil
and land. You can buy anything you want as long
as it is not prohibited by law. You can also do
what you want with your property. You can give it
away, lease it, sell it, or use it for yourself. If you
engage in the free enterprise system, you try to
make money from your property ownership.
Ownership: Business Ownership
S There are many types of business. People who
start and operate their own businesses are
called entrepreneurs. Others support business
by investing their money in parts or shares of a
company. These shares of a business are called
stocks and the investors are called
stockholders.
Ownership: Intellectual
Property Rights
S Intellectual property rights are protected. That
means that a product or idea a person creates
or invents is legally protected from being
copied.
S Patents, trademarks, copyrights, and trade
secrets are intellectual property rights.
Intellectual Property Rights
S Patent the inventor owns the rights to the invention, which can be
an item, or idea; exclusive rights for up to 20 years.
S A trademark is a word, name, symbol, sound, or color that
identifies a good or service. It cannot be used by anyone but the
owner. Unlike a patent, a trademark can be renewed forever, if it is
being used by a business.
S A copyright involves anything that is authored by an individual,
such as writing, music, and artwork. The author has exclusive
rights to produce and sell the work and has a valid life of plus 70
years.
Competition
S The free enterprise system encourages businesses to attract
new customers and keep old ones. Other businesses try to
take those same customers away. This struggle for customers
is called competition.
S Competition is an essential part of the free enterprise system.
It is one of the ways the free enterprise system benefits
consumers.
S Competition forces businesses to produce better quality
goods and services at reasonable prices.
Competition: Price and
Nonprice Competition
S 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.
S In nonprice competition, businesses choose to
compete on the basis of factors that are not related
to price. These factors include the quality of the
products, service, financing, business location, and
reputation.
Competition: Monopolies
S A monopoly is exclusive control over a
product or the means of producing it.
S Monopolies are not permitted in a market
oriented economic system because they
prevent competition.
S Business risk is the potential for loss or
failure.
Profit
S Profit is the money earned from
conducting business after all costs and
expenses have been paid.
S Profit is the motivation for taking the
risk of starting a business.
Supply
S Supply is the amount of goods producers are willing to
make and sell.
S The law of supply is the economic rule that price and
quantity supplied move in the same direction. This means
that as prices rise for a good, the quantity supplied
generally rises. As the price falls, the quantity supplied by
sellers also falls.
S Thus, suppliers want to supply a larger quantity of goods
at higher prices so their businesses can be more profitable.
Demand
S Demand refers to consumer willingness and ability
to buy products.
S The law of demand is the economic principle that
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.
Surpluses, Shortages, &
Equilibrium
S Surpluses of goods occur when supply exceeds demand.
S Shortages occur when demand exceeds supply,
shortages of products occur.
S When the amount of a product supplied is equal to the
amount that is demanded, a state of equilibrium exists.
When supply and demand are balanced, the result is
that all parts of the economy benefit.
Section 5.2 Business
Opportunities
S
Objectives
S Compare for-profit and nonprofit organizations.
S Distinguish between public and private sectors.
S List the major types of businesses in the organizational
market.
S List the major functions of business.
Types of Business
S A business can be categorized by its
size and scope, by its purpose, and
by its place within the industry.
Size and Scope
S Large versus Small Businesses
S A small business is one that is operated by only one or a few
individuals. It generally has fewer Than 100 employees. A
large business is usually considered one that employs more
than 1,000 people.
S Domestic versus Global
S A business that sells its products only in its own country is
considered a domestic business.
S A global business sells its products in more than one
country.
Purpose
S For-profit versus Nonprofit Organizations
S A for-profit business seeks to make a profit from its
operations. A nonprofit organization functions like a
business but uses the money it makes to fund the cause
identified in its charter. Nonprofit organizations generate
revenue through gifts and donations.
S Public versus Private
S Public sector are government-financed agencies, such as
the Environmental Protection Agency.
S Private sector are businesses not associated with
government agencies.
Industry and Markets
S Wholesalers obtain goods from manufacturers
and resell them to organizational users, other
wholesalers, and retailers. Wholesalers are
also called distributors. Retailers buy goods
from wholesalers or directly from
manufacturers and resell them to the consumer.
For the most part, retailers cater to the
consumer market.
The Functions of Business
Production and Procurement
S The process of creating, growing,
manufacturing, or improving on goods and
services is called production.
S Procurement involves buying materials,
products, and supplies needed to run a
business.
Marketing
S All activities from the time a product leaves the producer or
manufacturer until it reaches the final consumer are
considered marketing activities.
S All types of business, regardless of size, scope, intended
purpose, and products sold use marketing activities in their
operations.
S All related marketing activities support the buying and selling
functions.
Management
S Management is the process of achieving company goals by
effective use of resources through planning, organizing, and
controlling.
S Management determines the corporate culture, ethics, and mission
or vision for a firm.
S Planning involves establishing company objectives and strategies to
meet those objectives.
S Organizing involves specific operations, such as scheduling
employees, delegating responsibilities, and maintaining records.
S Controlling has to do with overseeing and analyzing operating
budgets to suggest the most cost-effective measures for a company to
follow.
Finance and Accounting
S Finance is the function of business that
involves money management.
S Accounting is the discipline that keeps
track of a company’s financial
situation.