Chapter 5 The Free Enterprise System

Traits of Private Enterprise Section 5.1

Traits of Private Enterprise  Founders of the United States defined freedom of choice as rights that are central to our society.  Consumers have the freedom to PURCHASE goods and services  They make purchases with the INCOME they earn

Traits of Private Enterprise  Business ownership by ordinary people  Also known as Free Enterprise  People are encouraged to start and operate their own businesses

Traits of Private Enterprise Basic Principles Basic Elements of Private Enterprise Freedom to own property Freedom to compete Freedom to take risks Freedom to make a profit

Freedom of Ownership  Buy what you want and do what you want with it as long as its not prohibited by law  Free to own personal property such as cars, computers, and homes  Free to own natural resources oil and land

Business Ownership  Can own a business in two ways 1.Start and run your own business: entrepreneurs 2.Invest: Stockholders

Intellectual Property Rights  Patents : exclusive rights to make, use, or sell that invention for 20 years  Trademark : word, name, symbol, sound or colors that identifies a good or service and cannot be used by anyone but the owner  Copyright : anything that is authored by an individual (ie: books, music, art)

Traits of Private Enterprise Basic Principles Similarities and Differences

Traits of Private Enterprise Traits of the Free Enterprise System

Competition  Struggle to gain new customers and keep old ones  Essential to the free enterprise system  Benefits the customer MINE! NO MINE!

Price and NonPrice Competition  Price Competition  All other things equal, the consumer will buy the product with the lowest price  Non-Price Competition  Competition based on factors that are not price such as quality, services, location, reputation

Traits of Private Enterprise Basic Principles How Price Competition and Nonprice Competition Affect What You Buy

Monopolies  No competition and one company controls the market for a given product  Not permitted in a free enterprise system  Prevents competition

Examples of Monopolies  Microsoft Case (2000)  Federal Judge declared Microsoft’s Windows operating system was a monopoly  It’s technological dominance was said to have stifled innovation  Ruling stated Window’s dominance was harmful to the free enterprise system

Traits of Private Enterprise Basic Principles Monopoly

Traits of Private Enterprise Traits of the Free Enterprise System

Business Risk  Potential for loss or failure  As potential for earnings gets greater, so does the risk.

Traits of Private Enterprise Traits of the Free Enterprise System

Profit  Profit: money earned from conducting business after all costs and expenses have been paid  Range of profit is usually 1%-5%  The remaining 95%- 99% pays costs, expenses and business taxes

Economic Cost of Unprofitable Firms  Lay off employees  Investors lose money  Pay less money to government in taxes

Economic Benefits of Successful Firms  Hire more employees  Investors earn money  Pay more money to the government in taxes  Attract competition

Traits of Private Enterprise Traits of the Free Enterprise System

Supply and Demand  Supply: the amount of goods producers are willing to make and sell  Price and quantity supplied move in the same direction  Demand: consumer willingness and ability to buy products  Price and demand move in opposite directions

Surpluses  Occurs when supply exceeds demand  If price seems too high to consumers they will not buy

Shortages  Occurs when demand exceeds supplies  Businesses can raise prices and still sell their merchandise

Equilibrium  Occurs when the amount of a product being supplied is equal to the amount being demanded  Everyone wins

Traits of Private Enterprise Traits of the Free Enterprise System

Business Opportunities Section 5.2

Size and Scope  Size: large or small business  Scope: extent of its business operation  Serve a small neighborhood or serve globally

Size and Scope Small Businesses :  Operated only by one or a few individuals  Generally less than 100 employees  Large Businesses:  Typically employs 1000 people  National Companies

Domestic Versus Global  Domestic: sells its products only in its own country  Opportunities for growth are limited to customers within that country  Global: sells its products in more than one country

Business Opportunities Business Functions

For-Profit Versus NonProfit Organization  For-Profit : seeks to make a profit from its operations  NonProfit : functions like a business but uses the money it makes to fund the cause identified by its charter  Generate revenue through gifts and donations

Public Sector Versus Private Sector  Public: government financed agencies  Private: businesses not associated with government agencies

Business Opportunities Business Functions

Industry and Markets  Business are classified according to:  The industry they represent  The products they sell  The markets they target  Industry: group of establishments primarily engaged in producing or handling the same product or group of products or in rendering the same services

Consumer, Industrial, and Service Markets  Consumer: consists of customers who buy goods for personal use  Industrial: consists of business customers who buy goods for use in their operations  Service: function in both consumer and industrial market

Business Opportunities Business Functions

4 FUNCTIONS OF BUSINESS 1. Production & Procurement 2. Marketing 3. Management 4. Finance & Accounting

Production  Production: process of creating, expanding, manufacturing, or improving on goods and services

Procurement  Buying and reselling goods that have already been produced  Example: Supermarket

5 “Rights” of Merchandising “Marketing”  The right goods  At the right time  In the right place  At the right price  In the right amount

Management  Management: process of achieving company goals by effective use of resources through planning, organizing, and controlling  Planning: establishing company objectives and how to meet them  Organizing: specific operations  Controlling: overseeing and analyzing budgets

Business Opportunities The Functions of Business Management Tasks

Finance and Accounting  Finance: function of business that involves money management  Accounting: discipline that keeps track of a company’s financial situation  Balance sheet  Profit & loss statement  Cash flow statement

Balance Sheet  Reports a company’s assets, liabilities, and owner’s equity  Assets: things a company owns  Liabilities: money owed by a business to its creditors

Profit & Loss Statement  Reflect the ongoing operations of a firm  Sales revenue and investments  Costs and expenses of doing business

Financial Statements & SWOT Analysis  Financial statements provide important information regarding how well a business is doing financially, therefore they are useful in a SWOT analysis

Business Opportunities Business Functions

Business Opportunities The Functions of Business Examples of How Each of These Functions Might Be Applied