The Free EnterpriseChapter 5.1

2.3 Analyze the Free Enterprise

Our Basic Economic Freedoms

• Freedom of Ownership– Personal Items, businesses, private property,

Intellectual property

• Freedom to Compete

• Freedom to Take a Risk

• Freedom to Make a Profit– Profit is the driving motive in our economy

Intellectual Property Rights

• Patent: Invention for up to 20 years

• Trademark: word, name, symbol or color identifying a business or product – life of business

• Copyright: writings, music, artwork for life of author plus 70 years

Competition

• Struggle between companies for customers

• Benefits:

– Lower Prices

– Better Quality

Two Types of Competition

PRICE

Focuses on the sale price of a product

NONPRICE

Compete on the basis of factors not related to price

- services

- location

- reputation, etc.

Monopoly

• There is no competition and one firm controls the market for a given product.

• Gives exclusive control over a product or means of production– Microsoft = Technology dominance

• NOT LEGAL IN A DEMOCRACY– Exception = utilities

Risk = Profit

• Risk = The potential for loss or failure.– Money, investments, reputation, – 85% of new product fail in first year!

• You must take risk in order to earn profit• Profit is the money earned after all costs and

expenses have been paid. – 1-5% of sales

• Profit provides the incentive for a person to take risk.

How are prices determined in our market place?

The interaction of Supply and Demand!

2.6 Evaluate the relationship of cost/profit to supply/demand

Law of Demand

DEMAND: consumers’ willingness and ability to buy products

The lower prices create higher demand; higher prices have a lower demand

Exception to the Law: Diminishing Marginal Utility: Consumers will buy just so much of a given product

Elasticity of Demand (2 types)

• Elastic Demand – Slight change in $ price $ = creates a LARGE change in demand– Products are items of WANT, not in urgent

need, substitutes are available

• Inelastic Demand – Changes in $price$ = creates very little change in demand– Products are necessities, in urgent need, have

no available substitutes

Law of Supply

SUPPLY: The amount of goods producers are willing to make and sell

At higher prices, producers will offer a large quantity of products for sale; at lower prices, producers offer fewer products for sale

Supply and Demand TheoryTerms to know!

• Equilibrium: The point at which Supply and Demand are equal– The goal!!

• Surplus: Supply exceeds Demand; Prices will typically lower to reach demand (equilibrium)

• Shortage: Demand exceeds Supply; Prices will generally rise until producers can meet the demand (equilibrium)