Chapter 3 ~ The Free Enterprise System

ObjectivesBasic principles of a free enterprise system

The role of CompetitionThe importance of risk and profit

3.1 CapitalismIn the United States we have the freedom to

make decisions about:Where we want to workWho we want to represent us in governmentFreedom of choice

Free Enterprise SystemThe Free Enterprise System (theory)

encourages people to start and operate their own business without government involvement

We have a Modified System – the government does intervene on a limited basis to protect us while still supporting the basic principles of free enterprise

Freedom of OwnershipWe are free to own:

Personal property – cars, homes, cell phones etc.

Natural Resources and land – Oil and land

We can buy whatever we want as long as its legal

We can do what we want with our property (!) sell it, lease it, or give it away

Freedom of OwnershipThe free enterprise system encourages us to

own businesses; however there are some restrictions on how and where we can operate themMost businesses are zoned out of areas where

there is private housing

Businesses must comply with certain environmental regulations Intellectual property rights and licensing

agreements will be discussed at a later time

CompetitionThe struggle between companies for

customers; its essential to the free enterprise system.

Attracts new customers and keeps existing ones

Forces businesses to produce higher quality goods and services at reasonable prices

Results in new and improved products and a wider selection of goods and services

Results of competition increase the nation’s output of goods and services and its standard of living

Competition ~ Price and Non PricePrice Competition:

Focuses on the price of a product; assuming all other things are equal, consumers will buy the product/service at cheapest price

Price is always stressed in their advertisements Burlington Coat Factory, Ross, Marshalls,

Homegoods, and Biglots

Competition ~ Price and Non PriceNon Price –

Businesses compete on factors not based on price; quality of the goods, financing, location, reputation and sales expertise Nordstroms, Macy’s, Bloomindales, Lord and Taylor

Some companies don’t always use one strategy over another. Its not uncommon for a business to use both approaches to get the customer

Grocery Stores now have pharmacy’s, dry-cleaning, café’s, floral departments, photo departments, delivery services, etc.

Discount Stores like Target and Walmart now carry food items; frozen, ready to eat, etc.

The services that these stores offer are intended for one-stop shopping

MonopoliesExclusive control over a product or the

means of producing it.Not allowed under the free enterprise

system, unless regulatedThere is no competition when one firm

controls the market for a given productWithout competition there is nothing stopping

a company from acting without regard to consumer wants and needs, companies can charge whatever they want, control the quality of the product and decide who gets it

Regulated MonopoliesThere are only a few!The government has allowed some industries

to control one product when it would be wasteful to have more than one firm

Currently, Utility companies are being deregulated; PSE&G

AT&T ~ use to be the only phone provider; it was broke up in 1982How many phone companies can you think of?

RiskThe potential for loss or failure when you

want to own your own business. (You also have the potential to make a lot of money!)

Risk is always a factor with private ownershipUsually, the higher the potential for earnings

are, the higher the risk1 out of 3 businesses fail within the first year

of operation in the United StatesWhen an industry develops, more people enter

it so the competition becomes greater

Risk continued……….There is also risk involved in developing new

products; it’s very expensive to introduce new products85% of new products fail within the first year

Profit ~ Yay!!Profit is the money earned from conducting

business after all costs and expenses have been paid

The concept of profit is the driving force in a free enterprise system

The range of profit for most businesses is 1 to 5% of sales; the remaining percent (95 to 99) pays the operating costs of the business, expenses and taxes!

Obviously, profits remain high when sales are high (demand) and costs are low

When a business isn’t successful….Usually the first thing done is laying off employees

If corporations lose money the investors lose if their stock value goes below the price paid for it; stock is sold and there are fewer resources

R&D is stopped Ripple effect in the other industries needed for that

business suppliers lose, transportation companies lose

Everyone loses when a business fails

When a business is Successful….More people are hired and morale is high;

customers/consumers will also spend more moneyThere is more money discretionary income to

spend on luxury itemsInvestors earn money on their stocks so they may

buy more sharesVendors and Suppliers make moneyThe government makes more money on increased

taxesBusiness and people are more likely to donate to

charity

In Review objectives

In your notebook, answer the following about The Free Enterprise System:

1. What are the basic principles of our (modified) system?2. What is the role of Competition?3. What is the importance of risk and profit?

3.2 Government and Consumer Functions ~ ObjectivesThe roles government plays in our free

enterprise system

The theory of supply and demand

Government InvolvementOur government provides four roles in our

modified free enterprise system1. Provides general services – military, law

enforcement, fire protection, roads, bridges, libraries, social welfare system, Medicare and Medicaid, disaster assistance

1. All paid through our taxes

2. Supports BusinessesSmall Business Administration SBA

Helps small businesses with loans and other services

Establishes trade alliances with other countries Largest consumer of goods and services

State and Local LevelRequires licensing for hairstylists and manicuristsRestaurant InspectorsMandates minimum wage practicesInvestigates Fraudulent business Provides laws and regulations for copyrights,

patents and trademarksWill impose trade restrictions with other countries

if necessarySecurities and Exchange Commission – SEC,

regulates the sale of stocks and bondsLicensing of financial advisors and brokerage firms

State and Local LevelRegulates industry

Making laws is one of the principal functions of government; their designed to protect the health, safety and welfare of individuals and businesses

Laws passed to regulate how businesses operate:

Sherman Antitrust Act – (1890) Prevents monopolies and predatory pricing; one company cannot under-charge for a product that would put their competition out of business

State and Local LevelClayton Antitrust Act – (1914) Reduces

loopholes in the Sherman Antitrust Act

Federal Trade Commission –FTC –Established the same year to enforce both laws; they since expanded to investigate deceptive business and advertising practices

Federal Reserve System – regulates economic stability of businesses and our banking system

Consumer and Worker ProtectionFood and Drug Administration – FDA

Regulates food and drug labeling

Equal Employment Opportunity Commission – EEOC

Occupational Safety and Health Administration – OSHARegulates workplace safety and health

Consumer Product and Safety Commission – CPSPRegulates products that are unsafe

Environmental Protection Agency – EPARegulates and protects our environment

4. CompetitorThe government also acts a competitor:

TVA – Tennessee Valley Authority Provides electricity to parts of the south. Was established

during the Great Depression because businesses were not willing to invest in damns and power plants

U.S. Postal Service – Provides mail service nationwide. Is currently going under due to competition and Email; Saturday delivery may be stopped

Amtrak – Passenger Rail System – businesses no longer wanted to offer train service

Our government also runs state parks and campgrounds

The Role of the Consumer in the Free Enterprise SystemMost of the goods and services produced in the United

States are bought by consumers for personal use.Consumers do two major things:

1.They (we) pick the winners of the products and services that will be successful in the marketplace

2. Determine Demand for any given product which in turn, determines prices

We are known as a consumer-oriented society; we have the power to decide which products will be produced and which companies stay in business ……………..

Determining PricesSupply and DemandIn theory, Supply and Demand determine

prices and products in a market economy.

Supply – The amount of goods producers are willing to make and sell

Law of Supply – The higher the price of a product the more willing producers are to make it because it’s a higher profit for them

Determining PricesSupply and DemandDemand – Consumer willingness and ability

to buy products.

Law of Demand is the theory that as price increases, demand decreases

These conditions often determine whether prices go up, down, or stay the same

Supply and Demand

Surplus occurs if supply of products exceeds the demand of the products; sale prices usually result.

Shortages occur if the demand for products exceeds supply; business can demand higher prices.

Equilibrium – exists when the product being supplied equals the amount being demanded.Win-Win SituationEveryone's needs and wants are satisfied in the most efficient way possible