1. The Free Enterprise System Chapter 5.2: Market-Oriented Economic Systems

2. Main Idea  Countries that are active in the global marketplace have market-oriented economic systems and follow the principles of the free enterprise system: competition, property ownership, risk, and the profit motive. Pricing in a free enterprise system is determined primarily by supply and demand theory.

3. Objectives  Explain the characteristics of a free enterprise system  Distinguish between price and nonprice competition  Explain the theory of supply and demand

4. Key Terms Encourages individuals to start and operate their own businesses in a competitive system, without government involvement. Free Enterprise System A government-issued exclusive right to make, use, or sell an invention for up to 20 years. Patent Is a word, name, symbol, sound, or color that identifies a good or service and that cannot be used by anyone but the owner. Trademark Involves anything that is authored by an individual Copyright

5. Key Terms The struggle between companies to attract new customers, keep existing ones, and take away customers from other companies. Competition Focuses on the sale price of a product Price Competition Businesses choose to compete on the basis of factors that are not related to price. Nonprice Competition When there is no competition and one firm controls the market for a given product. Monopoly

6. Key Terms The potential for loss or failure. Business Risk Is the money earned from conducting business after all cost and expenses have been paid. Profit Is the amount of goods producers are willing to make and sell. Supply Refers to consumer willingness and ability to buy products. Demand

7. Basic Principles of a Free Enterprise System Freedom of Ownership CompetitionRiskProfit Supply and Demand  A free enterprise system encourages individuals to start and operate their own businesses in a competitive system, without government involvement.

8. Freedom of Ownership  Free to own personal property, such as cars, computers, and homes.  Also can own natural resources like oil and land.  You can buy what you want and do what you want with your property.

9. Business Ownership  Free enterprise system encourages individuals to own businesses.  Individuals that own businesses = entrepreneurs.  Other may not want to run a business so they invest their money in stocks.

10. Business Ownership (cont.)  When a company does well, stock prices increase.  Businesses may be restricted on how and where they operate  Most businesses are zoned out of areas of private housing

11. Intellectual Property Rights  Intellectual Property Rights:  Patents = on an invention, you alone own the rights to that item or idea :  To ensure that protection of an invention, you would apply for a patent at the U.S. Patent and Trade Office.  If granted, you have the right to make, use, sell your invention for up to 20 years.  Trademarks = a word, name, symbol, sound, or color that identifies a good or service :  Unlike a patent, a trademark can be renewed forever.

12. Intellectual Property Rights (cont.)  Intellectual Property Rights:  Copyrights = involves anything that is authored by an individual:  It gives the author the right to reproduce or sell the work.  Valid for the life of the author plus 70 years  Trade Secrets:  Information that a company keeps and protects for its use only, but it is not patented.  Ex: Coca-Cola’s formula for Coke is a trade secret.

13. Intellectual Property Rights  A company must get permission to use another company’s name, symbol, creative work, or product.  A licensing agreement protects the originator’s name and product.  Ex: A T-shirt manufacturer might be granted a licensing agreement with the NFL so it can produce T-shirts with NFL logos on them.

14. Competition  Competition is the struggle between companies to attract new customers, keep existing ones, and take away customers from other companies.  Competition is an essential part of a free enterprise system.  Competition forces businesses to produce better- quality goods and services at reasonable prices.

15. Competition  Competition results in a wider selection of products from which to choose.  Helps to increase the nation’s output of goods and services.  Two basic ways businesses compete:  Price competition  Nonprice competition

16. Price and Nonprice Competition  Price Competition = focuses on the sale price of a product:  Ex: Wal-Mart’s “Always Low Prices. Always” stresses price as the primary focus of its competitive advantage, as does Southwest’s focus on low fares.  Companies that run sales and offer rebates also use price competition.

17. Price and Nonprice Competition  Nonprice Competition = businesses choose to compete on the basis of factors that are not related to price:  Factors include the quality of the products, service, financing, business location, and reputation.  Some nonprice competitors stress the qualifications or expertise of their personnel.

18. Monopolies  Monopoly = Exclusive control over a product or the means of producing it:  Monopolies are not permitted in a free enterprise system because they prevent competition. (Microsoft)  The U.S. Gov’t has allowed a few monopolies to exist, mainly in industries where it would be wasteful to have more than one firm. (Natural gas & electric companies).

19. Risk  Business Risk = The potential for loss or failure  As the potential for earnings increase, so does the risk. (Putting the money in the bank with guaranteed interest is less risky than investing in the stock market.)

20. Profit  Profit = Money earned from conducting business after all costs and expenses have been paid.  Profit is the motivation for taking risk of starting a business. It is the potential reward  Profits are good for our economy. It drives the free enterprise system. It allows people to develop new products and services in the hope of making a profit.

21. Economic Cost of Unprofitable Firms  Economic Cost of Unprofitable Firms  When profits decline, companies lay off employees which equals a rise in unemployment.  When unemployment rises, so does the cost of social services.  Investors cal lose money is the stock value of a public company falls below what they paid for it.  Government suffers when businesses are doing poorly, because less taxes are paid to the government.

22. Economic Benefits of Successful Firms  Economic Benefits of Successful Firms  Profitable businesses hire more people  Employees have higher incomes, better benefits and higher morale.  Investors earn money from their investments, which they spend or reinvest.  Vendors and suppliers make more money  The government makes from the taxation of businesses and individuals.

23. Supply & Demand Supply and demand determines the prices and quantities of goods and services produced  Supply = the amount of goods producers are willing to make and sell.  The law of supply is the economic rule that price and quantity supplied move in the same direction.  As prices rises, the supply rises. As prices fall, the supply falls.  In order to be profitable, suppliers want to supply goods at a higher prices.

24. Supply & Demand  Demand = Consumers willingness and ability to buy products.  The law of demand is the economic principle that price and demand move in opposite directions  As the price of a good increases, the quantity of the good demanded falls.  As prices falls, the demand for the good increases.

25. Surpluses, Shortages & Equilibrium  When supply and demand interact in the marketplace, conditions of surplus, shortage or equilibrium are created.  These conditions often determine whether prices will go down, go up, or stay the same.

26. Surpluses, Shortages & Equilibrium  Surpluses = of goods occur when supply exceeds demand. These conditions often determine whether prices will go down, go up, or stay the same.  Shortages = when demand exceeds supply, shortages of products occur. When shortages occur, businesses can raise prices and still sell their merchandise.  Equilibrium = when the amount of a product being supplied is equal to the amount being demanded, equilibrium exists.

27. After you read 1.Provide an example of how freedom of ownership may be limited by the government. 2.What are intellectual property rights and how does the law protect these rights? 3.In supply and demand theory, when is equilibrium achieved?

28. Section 5.2: Business Opportunities

29. The Main Idea  The major functions of a business are production or procurement, marketing, management, and finance. The analysis of these key functions is an excellent basis for determining the strengths and weaknesses of a company as part of a SWOT analysis.

30. Objectives  Recognize the difference between for-profit and nonprofit organizations  Distinguish between the public and private sectors  List the major types of businesses in the industrial market

31. Key Terms A business that sells its products only in its own country is considered a domestic business Domestic Business A business sells its products in more than one country. Global Business Seeks to make profit from its operations For Profit Business Functions like a business but uses the money it makes to fund the cause identified in its charter. Non-Profit

32. Key Terms (cont) Government financed agencies such as the FDA, Social Security are part of the Public Sector Public Sector Business not associate with government agencies are part of the Private Sector Private Sector Consists of a group of establishments primarily engaged in producing or handling the same product. Industry In the industrial market, it is a demand based on, or derived from the demand for consumer goods and services. Derived Demand

33. Key Terms (cont) Obtain goods from manufacturers and resell them to industrial users, other wholesalers, and retailers. Wholesalers Buy goods from wholesalers or directly from manufacturers and resell them to the consumer. Retailers The process of creating, expanding, manufacturing, or improving on goods and services. Production The process of achieving company goals by effective us of resources through planning, organizing and controlling. Management

34. Key Terms (cont) Function of business that involves money management Finance The discipline that keeps track of a company’s financial situation. Accounting

35. Business Classification Businesses can be classified by:  It’s size and scope  It’s purpose  It’s place within the industry

36. Size and Scope A business can be categorized two ways:  Large versus Small Businesses  Small business is one that is operated by only one or a few individuals. (Mom & Pop). It has fewer that 100 employees  Large business is usually one that employs more than 1,000 people.  Domestic Versus Global  A business that sells its products only in its own country is considered a domestic business  A business sells its products in more than one country.

37. Purpose A business firm serves the needs of its customers in order to make a profit. To understand this difference, we need to distinguish between for-profit and nonprofit organizations, and between public and private enterprise.

38. For-Profit Vs. Nonprofit Organizations For-profit business seeks to make a profit from its operations. Nonprofit organization functions like a business but uses the money it makes to fund the cause identified in its charter. Nonprofit organizations generate revenue through gifts and donations, some even sell goods or services.

39. Public Vs. Private Main purpose is to provide service to the people in the country or community in which they operate. Government-financed agencies like these are part of the public sector. Businesses not associated with government agencies are part of the private sector.

40. Industry and Markets Businesses are often classified according to the industry they represent, the products they sell, and the markets they target. The government provides a system for classifying types of business by industry and sector. Products and markets are classified according to intended use.

41. NAICS The U.S., Canada, and Mexico jointly developed the North American Industry Classification System (NAICS). The information in the NAICS can be helpful to businesses looking for new marketing opportunities and to individuals who may want to find employment or invest in those sectors.

42. Consumer, Industrial, and Service Markets The industrial market consists of business customers who buy goods for use in their operations. Derived demand in the industrial market is based on, or derived from, the demand for consumer goods and services. Wholesalers obtain goods from manufacturers and resell them to industrial users, other wholesalers, and retailers. Retailers buy goods from wholesalers or directly from manufacturers and resell them to the consumer

43. The Functions of Business Production and Procurement MarketingManagement Finance and Accounting

44. Production and Procurement Production is the process of creating, expanding, manufacturing, or improving on goods and services. Procurement involves buying and reselling goods that have already been produced.

45. SWOT Analysis, Wholesalers, and Retailers The five “rights” of merchandising are having: the right goods at the right time in the right place at the right price in the right amount

46. Marketing All types of business, regardless of size, scope, intended purpose, and products sold use marketing activities in their operations All related marketing activities support the buying and selling functions.

47. Management Management is the process of achieving company goals by effective use of resources through planning, organizing, and controlling. Planning involves establishing company objectives and forming strategies to meet these objectives.

48. Financing and Accounting Finance is the function of business that involves money management. Accounting is the discipline that keeps track of a company’s financial situation. If you want to analyze a company’s finances, you would study its balance sheet, profit and loss statement, and possibly its cash flow statement.