1. The Free Enterprise System Ch. 5

2. Basic Principles – Free Enterprise System Freedom of Choice Invest Their Money All of These Freedoms are a Part of a Market-Oriented Economic System Consumers have freedom to buy and sell. They make these purchases with the income they earn. People can also invest heir money in banks to earn interest. Or invest their money in businesses to earn dividends. Free or Private Enterprise. Fundamental to the concept of private enterprise.

3. Basic Elements Freedo m to… Compete Take Risks Make a Profit Own Property

4. The Free Enterprise System  People are encouraged to start and operate their own businesses as a part of the free enterprise system.  Marketplace controls prices through interaction of supply and demand.  Supple > Demand = Prices tend to drop  Demand > Supple = Prices tend to go up

5. Government Intervention?  Sometimes the government intervenes to protect their citizens.  EX: During the 2008-2009 Recession, the U.S. intervened in businesses such as banks and the auto industry. Did this because they felt that some businesses needed regulations to help the economy.

6. Ownership Business Ownership People are encouraged to own their own businesses. Some restrictions apply. Intellectual Property Rights Protected Patents, Trademarks, Copyrights

7. Competition  Free Enterprise System encourages businesses to attract new customers and keep old ones.  Because of this, a businesses major struggle in a free enterprise system is competition.  Competition encourages businesses to continue to produce better-quality goods and services.

8. Two Basic Strategies to Compete Competition Price Competition Monopolies Non-price Competition

9. Monopolies  When there is no competition and one firm controls the market for a given product.  Exclusive control over a product or the means of producing it.  These are NOT permitted in a market-oriented economic system.  RD. Pg. 117 in class

10. Business Risk  Potential risk for loss or failure.

11. Profit  Money earned from conducting business after all costs have been paid.  Profit is the motivation for an individual to start a company and accept the risk.  Range of profit is usually only 1-5% of a companies earnings. 95-99% is costs.

12. Unprofitable Firms  Usually lead to employees being laid off.  Stockholders lose money if the stock value falls below what they paid for it.  Government suffers because unprofitable firms pay less money to the government in taxes. Also a rise in unemployment.

13. Successful Firms  Hire more people (less unemployment)  More taxes to government  Attract competition  Companies more likely to donate to charities when doing well  Increase in demand for products due to higher incomes (less unemployment, people have money to spend)

14. Supply and Demand  Supply > Demand = Surplus (lower prices)  Demand > Supply = Shortage (businesses can raise prices)  It is against the law in most cases to increase the price of a product during a shortage if the shortage is caused by a natural disaster i.e. Hurricane Katrina)

15. Equilibrium  Supply = Demand  If equal, all parts of the economy benefit.  Fair prices  Companies experience a steady and predictable flow of business.

16. Class Work  Discuss the competition between Target and Wal-Mart.  Many high end car companies choose to compete based on factors other than price. What are some examples of businesses that use non-price competition? List 5.  Do Review Key Concepts on Pg. 121  DUE BEFORE CLASS ENDS!  HW – 5.1 Packet – Due Wednesday