chapter 3 the free enterprise system1 section 3.1 capitalism marketing essentials

Chapter 3 The Free Enterprise System 1

Chapter 3 The Free Enterprise System

Section 3.1 Capitalism

Marketing EssentialsMarketing Essentials


SECTION 3.1SECTION 3.1

What You'll LearnWhat You'll Learn

Basic principles of a free enterprise system

The role of competition

The importance of risk and profit

CapitalismCapitalism


SECTION 3.1SECTION 3.1CapitalismCapitalism

Why It's ImportantWhy It's Important

In this chapter, you will develop an understanding of how our economic system operates. You will learn how prices are determined, as well as what roles the government and consumers play in the free enterprise system.



Key TermsKey Terms

free enterprise system

competition

price competition

nonprice competition

monopoly

risk

profit



In the United States, we have the freedom to make decisions about where we work and how we spend our money.

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

Basic Principles



Individuals in our free enterprise system are free to own personal property, such as cars, computers, and homes, as well as natural resources such as oil and land. You can buy anything you want as long as it is not prohibited by law.

Freedom of Ownership

Slide 1 of 3



In a free enterprise system people are encouraged to own businesses, but there are restrictions on how and where businesses may operate.


Businesses that make things may be forced to comply with certain environmental measures.

Businesses may be restricted in where they can locate.

Slide 2 of 3



If you get a patent on an invention, anyone who wanted to manufacture your product would have to pay you for its use through a licensing agreement.


Slide 3 of 3

Example: A T-shirt manufacturer gets a licensing agreement with the NFL to produce NFL logo T-shirts.



Competition is the struggle between companies for customers. Competition is an essential part of a free enterprise system. It forces businesses to produce better quality goods and services at reasonable prices.

Competition



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.

Price Competition

Example: Wal-Mart advertises "Always the Lowest Price—Always."



In nonprice competition, businesses compete based on

Nonprice Competition

the quality of the products, service and financing

business location reputation the qualifications or expertise of

their personnel



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

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

Monopolies



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

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

Risk



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

Profit is the engine that drives a free enterprise system.

Profit



Economic Cost of Unprofitable Firms

Unprofitable businesses lay off employees.

Their stock prices fall, so they have fewerresources 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 Firms

Profitable businesses hire more people.

Their investors earn from investing in the company.

Their vendors make more money.

Companies and employees give more to charities.

The government receives more taxes.

Competition benefits the consumer.


Chapter 3 The Free Enterprise System

Section 3.2 Government and Consumer Functions

Marketing EssentialsMarketing Essentials


SECTION 3.2SECTION 3.2

What You'll LearnWhat You'll Learn

The roles government plays in our free enterprise system

Supply and demand theory

Government and Consumer FunctionsGovernment and Consumer Functions


SECTION 3.2SECTION 3.2 Government and Consumer FunctionsGovernment and Consumer Functions

Why It's ImportantWhy It's Important

As a consumer, you need to understand your power to affect the prices you pay for products. As a voter, you have a responsibility to understand how decisions made by the government affect you, your investments, and your life in general.



Key TermsKey Terms

demand

supply

equilibrium

surpluses

shortages



The United States is a modified free enterprise system. In such a system, the government acts as:

The Role of Government

provider of services

supporter of business

regulator

competitor



Government as Provider of Services

To ensure the safety and general welfare of people in the United States, the government provides:

military protection

police protection

fire protection

free public education

job training

roads and bridges

public libraries

welfare system

health care for the elderly and poor



Government as Supporter of Business

The government provides disaster assistance to help both businesses and homeowners rebuild after disasters.

The Small Business Administration provides counseling and educational materials to support business.

The government is the largest consumer of goods and services in the U.S.



In the United States, most laws are designed to protect the safety, health, and welfare of individuals and the freedom of businesses to operate in our free enterprise economic system.

Government as Regulator



The government protects workers and consumers through the following federal agencies:

Government as Regulator: Consumer and Worker Protection

Food and Drug Administration (FDA)

Equal Employment Opportunity Commission (EEOC)

Occupational Safety and Health Administration (OSHA)

Consumer Product Safety Commission (CPSC)Slide 1 of 2



Environmental Protection Agency (EPA)

The Securities and Exchange Commission (SEC)

Government as Regulator: Consumer and Worker Protection

Slide 2 of 2



The government provides laws and regulations regarding patents, copyrights, and trademarks.

The government regulates trade with other countries to protect national security and to protect U.S. companies from unfair competition.

Government as Regulator: Business Protection

Slide 1 of 3



The Sherman Antitrust Act, passed in 1890, outlawed monopolies in business, protecting competition.

The Clayton Antitrust Act, passed in 1914, closed loopholes in the Sherman Antitrust Act.

The Federal Trade Commission (FTC) enforces both acts.


Slide 2 of 3



The Federal Reserve System is the nation's banking system. The Federal Reserve Board of Governors controls interest rates, increasing or decreasing rates to manipulate economic activity and inflation.


Slide 3 of 3



The federal government runs three businesses:

Government as Competitor

Tennessee Valley Authority provides electricity to the rural South

U.S. Postal Service provides national mail delivery

Amtrak provides passenger rail service, established under the Rail Passenger Act of 1970.



Consumers do two major things in the marketplace:

The Role of the Consumer

They pick the winners—the products and businesses that will be in the marketplace tomorrow.

They determine the demand for any given product, and therefore help determine prices.



Consumers decide which businesses will survive by "voting" with each purchase. The more votes (sales) a product gets, the more likely that product or company will survive.

Deciding Which Businesses Survive



Prices in a free enterprise system are determined by supply and demand.

Determining Prices

Supply and demand interact to determine the price customers are willing to pay for the number of products producers are willing to make.

Slide 1 of 4



Demand refers to consumer willingness and ability to buy products. According to the law of demand, if the price is low enough, demand for a product usually increases.

Determining Prices

Slide 2 of 4



Supply is the amount of goods producers are willing to make and sell.

Determining Prices

higher prices = more products for sale

lower prices = less products for sale

Slide 3 of 4



Equilibrium exists when the amount of product supplied is equal to the amount of product demanded.

Determining Prices

Slide 4 of 4



Surpluses of goods occur when supply exceeds demand. When this happens, businesses respond by lowering their prices in order to encourage people to buy more of the product.

Surpluses

Example: When grocery stores have lots of produce, they price the produce low to encourage people to buy.



When demand exceeds supply, shortages of products occur. When shortages occur, businesses can raise prices and still sell their merchandise.

Shortages

Example: An oil shortage increases the price of gasoline, so consumers who want to drive their vehicles pay the higher price.


3.2 Graphic OrganizerGraphic Organizer

The Determinants of Demand

DemandDemand

Existence of

Substitutes

Existence of

Substitutes

Prices of Complimentary

Goods

Prices of Complimentary

GoodsTastes

and Preferences

Tastes and

Preferences

Changes in

Population

Changes in

PopulationIncome Income

chapter 3 the free enterprise system1 section 3.1 capitalism marketing essentials

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