The Free Enterprise SystemThe Free Enterprise System

VocabularyVocabulary

Free Enterprise SystemFree Enterprise System CompetitionCompetition Price CompetitionPrice Competition Nonprice CompetitionNonprice Competition MonopolyMonopoly RiskRisk ProfitProfit

Basic PrinciplesBasic Principles In the United States, we have the freedom In the United States, we have the freedom

to make decisions about where we work to make decisions about where we work and how we spend our money.and how we spend our money.

A A free enterprise systemfree enterprise system encourages encourages individuals to start and operate their own individuals to start and operate their own businesses.businesses.

There are four basic principles:There are four basic principles:1.1. Freedom of OwnershipFreedom of Ownership2.2. CompetitionCompetition3.3. RiskRisk4.4. ProfitProfit

1. Freedom of Ownership1. Freedom of Ownership

Individuals in our free enterprise system are:Individuals in our free enterprise system are:

• Free to own personal property, such as cars, Free to own personal property, such as cars, computers, and homes, as well as natural computers, and homes, as well as natural resources such as oil and land. resources such as oil and land. You can buy You can buy anything you want as long as it is not anything you want as long as it is not prohibited by law.prohibited by law.

• Encouraged to own businesses, but there are Encouraged to own businesses, but there are restrictions on how and where businesses restrictions on how and where businesses may operate.may operate.

2. Competition2. Competition

• CompetitionCompetition is the is the struggle between struggle between companies for customers. companies for customers.

• Competition is an essential Competition is an essential part of a free enterprise part of a free enterprise system.system.

• It forces businesses to It forces businesses to produce better quality produce better quality goods and services at goods and services at reasonable prices.reasonable prices.

Price and Nonprice CompetitionPrice and Nonprice CompetitionThere are two categories of competition:There are two categories of competition:• Price competitionPrice competition focuses on the sale focuses on the sale price price

of a product. The assumption is that, all other of a product. The assumption is that, all other things being equal, consumers will buy the things being equal, consumers will buy the products that are lowest in price.products that are lowest in price.

InIn nonprice competitionnonprice competition, businesses compete , businesses compete based on nonprice factors such as:based on nonprice factors such as:

• The quality of the products, service The quality of the products, service and financingand financing

• Business locationBusiness location• ReputationReputation• The qualifications or expertise of The qualifications or expertise of

their personneltheir personnel

MonopoliesMonopolies

When there is When there is no competitionno competition and one and one firm controls the market for a given firm controls the market for a given product, a product, a monopolymonopoly exists. exists.

Monopolies are not permitted under a Monopolies are not permitted under a free enterprise system because they free enterprise system because they prevent competition.prevent competition.

3. Risk3. Risk

RiskRisk is the potential for is the potential for loss or failure in relation loss or failure in relation to the potential for to the potential for improved earnings.improved earnings.

As the potential for As the potential for earnings gets greater, earnings gets greater, so does the risk.so does the risk.

4. Profit4. Profit

ProfitProfit is the is the money earned money earned from conducting from conducting business after all business after all costs and expenses costs and expenses have been paid.have been paid.

Profit is the engine Profit is the engine that drives a free that drives a free enterprise system.enterprise system.

Economic Cost of Unprofitable FirmsEconomic Cost of Unprofitable Firms

Unprofitable businesses lay off employees. Their stock prices fall, so they have fewer

resources and investors lose money. They cut back on research and

development. Their suppliers and transporters suffer. The government receives less in taxes and

pay more in social services.

Economic Benefits of Successful FirmsEconomic Benefits of Successful Firms

Profitable businesses hire more people.Profitable businesses hire more people. Their investors earn from investing in the Their investors earn from investing in the

company.company. Their vendors make more money.Their vendors make more money. Companies and employees give more to Companies and employees give more to

charities.charities. The government receives more taxes.The government receives more taxes. Competition benefits the consumer.Competition benefits the consumer.