Market-Oriented Economic Systems Chapter 5 The Free Enterprise System Market-Oriented Economic Systems Section 5.1 Market-Oriented Economic Systems Section 5.2 Business Opportunities
Maket-Oriented Economic Systems Objectives Explain the characteristics of a free enterprise system Distinguish between price and nonprice competition Explain the theory of supply and demand Marketing Essentials Chapter 5, Section 5.1
Market-Oriented Economic Systems A free enterprise system X encourages individuals to start and operate their own businesses in a competitive system, without government involvement Marketing Essentials Chapter 5, Section 5.1
Free Enterprise Systems
Basic Principles of Free Enterprise Freedom to Own Personal Property Freedom to Compete Freedom to take risks Freedom to make a profit
1. Freedom of Ownership Free enterprise system enables us to own the following: Personal property Businesses Intellectual Property
A. Personal Property A Free enterprise system enables us to own personal property: Cars, Computers Homes Natural resources (oil and land) Buy want you want as long as not prohibited by law Do what you want with property – give it away, lease it, sell it, or use it
B. Business Ownership Entrepreneurs People who have started and own their own businesses Stockholders Others not involved in running a business but support businesses by investing their money in parts or shares of the company
C. Intellectual property rights Intellectual property rights: The ownership of ideas and control over the tangible use of those ideas through protection under federal and state law. Ex: copyrightable works, ideas, discoveries, and inventions
Three Types of Intellectual Property patent X A document granting an inventor sole rights to an item or an idea on an invention 20 year protection: would have to pay the patent holder through a licensing agreement to produce 2. trademark X A word, name, symbol, sound, brand name, brand mark, trade name, trade character, color, or a combination of these elements that identifies a good or service and cannot be used by anyone but the owner because it is registered with the federal government and has legal protection Lifetime protection: renewed indefinitely as long as it is being used by a business
Three Types of Intellectual Property 3. A copyright X involves anything that is authored by an individual, giving the author exclusive rights to reproduce or sell the work. Such works can be: Writings (books, articles, etc.) Music Artwork Author’s life + 70 year protection: A copyright usually lasts for the author’s life plus seventy years
2. Freedom of Competition competition X struggle between businesses to gain and keep customers There are two basic ways businesses compete: Price competition Non-price competition
Two Ways Businesses Compete 1. Price competition X a company focuses on distinguishing its products from the competition on the basis of low price. (This assumes, all other things being equal, consumers will buy the products lowest in price) Ex: through Sales and rebates Focus on lowest prices (Wal-mart, Southwest Airlines)
Two Ways Businesses Compete 1. Non-price competition X a company distinguished its products from the competition in areas other than price, such as: Quality of the products Service Financing Business location Reputation
Monopoly A monopoly X is exclusive control by one firm over a product or the means of producing it Monopolies are not permitted in a free enterprise system because they prevent competition
Monopoly Monopoly
3. Freedom to take a Risk Business risk is the potential for loss or failure As the potential earnings increase, so does the risk Some risks businesses take include: Competition Starting up – 1 of 3 new business fail in first year Investing in the development of new products 85% of new products fail in the first year Natural disasters Marketing Essentials Chapter 5, Section 5.1
4. Freedom to make a Profit Profit X the money earned from conducting business after all costs and expenses have been paid Profit is the motivation for taking the risk of starting a business 1% - 5% of total sales is profit for most businesses 95% - 99% of sales pays costs, expenses and business taxes Profits help the economy because they encourage: Competition and product development in hopes of earning a profit
Supply and Demand In free enterprise, supply and demand determine the prices and quantities of goods and services Supply X is the amount of goods producers are willing to make and sell The law of supply is that price and quantity supplied move in the same direction As prices rise quantity produced rises As prices fall quantity produced falls
Supply and Demand Demand X refers to consumer willingness and ability to buy products The law of demand is that price and demand move in opposite directions As prices increase the quantity demanded decreases As prices decrease quantity demanded increases
When supply and demand interact, three conditions are created: Surplus: Supply exceeds demand What happens to price? Price too high, demand decreases and must offer sales and promotions Shortage: Demand exceeds supply What happens with price? Can raise prices and still sell the product Equilibrium: Supply equals demand What happens? Everyone is happy
What is the equilibrium price if this is where supply and demand meet? $30 price, $30 quantity Surplus Shortage Surplus Supply > Demand Where is this on the chart? Shortage Demand > Supply Where is this on the Chart?
Market-Oriented Economic Systems Study Organizer What are the four characteristics of a free enterprise system.