+

The Free Enterprise SystemChapter #5

+Chapter Objectives

Explain the characteristics of a free enterprise system

Distinguish between price and non-price competition

Explain the theory of supply and demandRecognize the difference between for profit

and nonprofitDifference between public and private

sectorsList the types of business in the industry

market

+Products

List 10 products on a piece of paper that you buy all the time.

Now list next to each item a product that competes with your product listed.

+Basic Principles

Our nations founders believed we should have freedoms Freedom to:

Elect our government Make decisions about where we work and how we spend

our money Workers can negotiate and join unions Freedom to own personal property, compete, and take

risks to make a profit

+

Because of our freedoms we have a Free Enterprise System Free Enterprise system encourages individuals to start and

operate their own business in a competitive system, without government involvement.

+Freedom of Ownership

People can own business and personal property.

They can do anything with it also Give it away Lease it Sell it Use it themselves

+Business Ownership

Types of business Owners Entrepreneurs – People who start and run their own

business Stockholders – People who invest in a business by buying

stock

These are some restrictions on how and where a business may operate. Zoning, Safety, Compliance

+Intellectual Property Rights

Patents- for inventions You get exclusive right to make, sell and use for 20 years

Trademarks- for words, name, symbol, sounds and colors Can be renewed for ever

Copyrights – for anything authored by an individual (books, magazines, art, music) good for life of author plus 70 years

+Competition

Struggle for customer between to companies or products. Price Competition –focuses on the price they assume if all

things are equal people will go with the lowest price

Non-price Competition- choose to compete based on quality, service, location, and reputation

+Monopolies

Exclusive control over a product or the means of producing it.

Why don’t we want monopolies?

Do we have monopolies?

+Risk

Business Risk – is the potential for loss or failure. Higher profit opportunity higher risk

1 out of 3 business fail in the first year Higher the profit opportunity the more people jump into the

industry

+Profit

Money earned from conducting business after all cost and expenses have been paid.

Most business earn a 1 to 5% profit on their sales.

Is profit good for the economy? Why?

+Economic Cost of Unprofitable Firms

When companies are unprofitable they: Lay off workers Investors loose money – Stocks decline Less government gets in taxes

+Economic Cost of Profitable Firms

If a company is profitable they: Higher workers Pay workers better allowing for my

consumer spending Investors make money and stocks rise Government gets more money in taxes Companies are more likely to donate to

charity Helps other industries because people travel

and shop.

+Supply and Demand

Supply – The amount of goods producers are willing to make and sell Law of supply – the economic rule that price

and quantity supplies move in the same direction – prices rise supply rises

Demand – refers to consumer willingness and ability to buy products. Law of demand is the economic principle

that price and demand move in opposite direction – price increase demand decreases

+Supply

+Demand

+Surpluses

When supply exceeds demand

When price get higher than consumers want to pay the store gets a surplus and often runs a sale or lowers the price of goods.

+Shortages

When demand exceeds supply Companies can raise prices and still sell out of goods.

+Equilibrium

When the amount of a product being supplied is equal to the amount being demanded.

+

+Types of Business

Business can be categorized based on many different factors: Size and Scope Purpose Industry and Market

+Size and Scope

Large VS Small Large

Employees more than 1,000 people Owned as corporations

Small Owned by one or a few people Less than 100 employees Millions of mom and pop business 95% of all business are small business

+Domestic VS Global

Domestic - Business that sells its products in its own country Limits its scope of operation

Global- sells products in more than one country With the internet and faster transportation small and large

business are going global

+Purpose

Profit VS Nonprofit For Profit business – seek to make a profit from its operations Non Profit Business – functions like a business but uses the

money it make to fund the cause or charity. Generate money through gifts or donations Some sell goods or services also Don’t have to pay taxes They do pay employees and rent office space

+

Public VS Private Government-financed agencies like military, government

agencies, social security and medicare are part of the public sector

Business not associated with the government are part of the private sector

+Industry and Markets

North American Industry Classification System (NAICS) 6 digit code used to group industries based on what they

produce Consumer Industrial Service Markets

+

Derived Demand – Demand for a product because people demand another product it is a part of Tires (people are demand more cars)

+

Wholesalers- obtain goods from manufactures and resell them to industrial users other wholesalers and retailers

Retailers-buy goods from wholesalers or directly from manufactures and resell them to the consumer.

+Functions of Business 4 Main Functions

Production or Procurement Process of creating, expanding, manufacturing good or services Things to look at include speed to market, efficiency, innovation Procurement – buying and reselling goods that have already been

produced Things to look at when picking vendors

The right goods- right time-right price-right amount- right place Marketing

Includes all activities from the time it leaves the producer till it sells

Includes Distribution, Adverting, Pricing, 4 P’s Management

Achieving goals though planning, organizing, controlling Finance

Function involving Money

+Finance and Accounting

Balance Sheet

Profit and Loss Statement