Market-Oriented
Chapter 5Economic Systems
The Free Enterprise System
• Section 5.1 Market-Oriented Economic Systems
• Section 5.2 Business Opportunities
Maket-Oriented Economic Systems
Objectives
 Explain the characteristics of a free enterprise
system
 Distinguish between price and nonprice
competition
 Explain the theory of supply and demand
Marketing Essentials Chapter 5, Section 5.1
Market-Oriented Economic Systems
A free enterprise system X encourages
individuals to start and operate their own
businesses in a competitive system, without
government involvement
Marketing Essentials Chapter 5, Section 5.1
Free Enterprise Systems
Basic Principles of Free Enterprise
1. Freedom
2. Freedom
3. Freedom
4. Freedom
to
to
to
to
Own Personal Property
Compete
take risks
make a profit
1. Freedom of Ownership
Free enterprise system enables us to own the
following:
A. Personal property
B. Businesses
C. Intellectual Property
A. Personal Property
A Free enterprise system enables us to own
personal property:
• Cars,
• Computers
• Homes
• Natural resources (oil and land)
• Buy want you want as long as not prohibited by
law
• Do what you want with property – give it away,
lease it, sell it, or use it
B. Business Ownership
Entrepreneurs People who have started
and own their own businesses
Stockholders Others not involved in
running a business but support businesses
by investing their money in parts or shares
of the company
C. Intellectual property rights
Intellectual property rights: The ownership
of ideas and control over the tangible use of those
ideas through protection under federal and state
law.
Ex: copyrightable works, ideas, discoveries, and
inventions
Three Types of Intellectual Property
1. patent X A document granting an inventor sole rights
to an item or an idea on an invention
• 20 year protection: would have to pay the patent
holder through a licensing agreement to produce
2. trademark X A word, name, symbol, sound, brand
name, brand mark, trade name, trade character,
color, or a combination of these elements that
identifies a good or service and cannot be used by
anyone but the owner because it is registered with
the federal government and has legal protection
• Lifetime protection: renewed indefinitely as long as it
is being used by a business
Three Types of Intellectual Property
3. A copyright X involves anything that is authored by
an individual, giving the author exclusive rights to
reproduce or sell the work. Such works can be:
• Writings (books, articles, etc.)
• Music
• Artwork
Author’s life + 70 year protection: A copyright usually
lasts for the author’s life plus seventy years
2. Freedom of Competition
competition X struggle between businesses to
gain and keep customers
There are two basic ways businesses compete:
• Price competition
• Non-price competition
Two Ways Businesses Compete
1. Price competition X a company focuses on
distinguishing its products from the
competition on the basis of low price. (This
assumes, all other things being equal, consumers will buy the
products lowest in price)
• Ex: through Sales and rebates
• Focus on lowest prices (Wal-mart, Southwest
Airlines)
Two Ways Businesses Compete
1. Non-price competition X a company
distinguished its products from the
competition in areas other than price, such
as:
• Quality of the products
• Service
• Financing
• Business location
• Reputation
Monopoly
A monopoly X is exclusive control by one firm
over a product or the means of producing it
• Monopolies are not permitted in a free
enterprise system because they prevent
competition
Monopoly
Monopoly
3. Freedom to take a Risk
Business risk is the potential for loss or failure
• As the potential earnings increase, so does the risk
• Some risks businesses take include:
• Competition
• Starting up – 1 of 3 new business fail in first year
• Investing in the development of new products
• 85% of new products fail in the first year
• Natural disasters
Marketing Essentials Chapter 5, Section 5.1
4. Freedom to make a Profit
Profit X the money earned from conducting business after all
costs and expenses have been paid
Profit is the motivation for taking the risk of starting a business
•
•
1% - 5% of total sales is profit for most businesses
95% - 99% of sales pays costs, expenses and business taxes
Profits help the economy because they encourage:
• Competition and product development in hopes of earning a
profit
Supply and Demand
In free enterprise, supply and demand determine the
prices and quantities of goods and services
Supply X is the amount of goods producers are willing
to make and sell
• The law of supply is that price and quantity supplied
move in the same direction
• As prices rise
• quantity produced rises
• As prices fall
• quantity produced falls
Supply and Demand
Demand X refers to consumer willingness and
ability to buy products
• The law of demand is that price and demand
move in opposite directions
• As prices increase
• the quantity demanded decreases
• As prices decrease
• quantity demanded
increases
Supply and Demand
When supply and demand interact, three
conditions are created:
1. Surplus: Supply exceeds demand
• What happens to price?
• Price too high, demand decreases and must offer
sales and promotions
2. Shortage: Demand exceeds supply
• What happens with price?
• Can raise prices and still sell the product
3. Equilibrium: Supply equals demand
• What happens?
• Everyone is happy
What is the equilibrium
price if this is where
supply and demand meet?
Surplus
$30 price, $30 quantity
Surplus
Supply > Demand
Where is this on the chart?
Shortage
Demand > Supply
Where is this on the Chart?
Shortage
Market-Oriented Economic Systems
Study Organizer
What are the four characteristics of a free enterprise system.