Free Market systems, competition & supply and Demand concepts Unit 4.01 Free Market systems, competition & supply and Demand concepts

Objectives Identify economic products as either goods or services. Describe the role of profit, competition, and supply and demand in the free-market system. Distinguish between the main competitive market structures. continued

Objectives List the basic forms of business organizations. Describe the concept of business cycles. Explain the concepts of marketing and merchandising.

Chapter 3 The Fashion Industry Fashion is a complex, multibillion-dollar industry with millions of employees Manufacturers are companies that make goods Retailers are companies that sell merchandise to consumers Consumers are people who buy and use the finished products, such as apparel

The Fashion Industry The fashion industry includes all the businesses connected with designing, manufacturing, distributing, promoting, and selling textile and apparel products Goods are tangible, or real, items that are physically made by manufacturers Garments and accessories are examples of finished goods continued

The Fashion Industry Services are intangible activities performed for people Retailers perform services by buying finished items to sell to consumers providing stores in which shoppers can buy goods that were manufactured elsewhere Fashion goods and services are constantly changing to meet consumer needs

The Free-Market System In the United States, products are bought and sold in a market economy The economy operates as a free-market system, meaning that people freely choose how to spend their money sellers can charge any price and sell to anyone profit is the key motivation

Profit Motivation Profit is money left over after expenses and taxes are deducted from the company’s sales of goods or services Profits determine whether a business succeeds or fails A business with high profits is considered to be more successful than one with low profits

The Significance of Competition In a free-market system, many companies may be selling the same or a similar product Competition is rivalry among businesses to gain a larger share of the total market sales Competition encourages higher quality and more varied goods and services lower prices to consumers

The Supply and Demand Relationship When considering a good or service in economic terms, supply refers to the quantities that producers are willing and able to provide demand refers to the quantities that consumers are willing and able to buy Quantities of specific goods and services supplied and demanded continuously interact continued

The Supply and Demand Relationship The supply and demand relationship affects prices in these ways People will pay more for items in short supply Companies that make and sell a limited item can charge a higher price for it and make more profit Sellers of widely available products will have to sell at lower prices and less profit per item When demand for an item goes down, so does its price because not very many people want it continued

The Supply and Demand Relationship The forces of supply and demand combine with the profit motive to regulate what is produced and in what amounts The balance between them is reflected by current prices on the open market In theory, consumers get what they want and producers earn a profit by keeping up with public demand

Impacts on Society The free-market system uses a minimum amount of resources to achieve a maximum standard of living for consumers In this situation, both suppliers and consumers benefit All resources, or industrial materials and manufacturing capabilities, are scarce Resources are used as sparingly as possible by businesses to keep prices low continued

Impacts on Society A standard of living indicates the way people live It is based on the kinds and quality of goods and services people can afford In a free-market system, different products are offered at many different price levels This enables people to satisfy their needs and wants in the best ways

Competitive Market Structures In theory, the ideal market structure is pure competition, which has these characteristics: no single company in an industry is large or powerful enough to influence or control prices companies are free to enter or exit the industry without any pressure or restraints a company’s existence in or out of the market does not have much effect on the market continued

Competitive Market Structures A monopoly is a market structure opposite to pure competition A monopoly is a market in which there are no direct competitors only one company offers a given good or service for sale and it has total control over products and prices continued

Competitive Market Structures True monopolies are prohibited in the United States by antitrust legislation There are no textile or apparel monopolies Monopolies usually have lower costs per item for their products because of economies of scale Economies of scale are cost reductions resulting from large-scale mass production continued

Competitive Market Structures The market structure of an oligopoly is between that of pure competition and a monopoly Oligopolies have only a few large rival firms offering the same type of product These firms dominate the market for that product and usually react to each other’s actions continued

Competitive Market Structures The U.S. government has the power to prevent mergers of firms that would reduce competition in an industry In the market structure of oligopoly, it is hard for new firms to enter the industry Fashion companies do not exist as oligopolies All industries fall between the two extremes of pure competition and monopoly

Basic Forms of Business Organizations The three most common types of company ownership in the free-market system are sole proprietorships partnerships corporations Each form has advantages and disadvantages

Sole Proprietorships Sole proprietorships are business owned by one person, such as a small fashion shop The owner has freedom, independence, and flexibility in running the business controls all the profit received by the business has the major risk of being liable for all the debts Sole proprietorships have few government regulations

Partnerships Partnerships are unincorporated businesses co-owned and operated by two or more persons They are easy and inexpensive to form In general, partnerships have higher profit potential than sole proprietorships higher credit ratings continued

Partnerships The disadvantages of partnerships are unlimited liability of the partners the potential for conflict between the partners possible management confusion with more than one person having a say in the daily operations of the business

Corporations Corporations are separate legal entities Corporations are chartered enterprises with many of the legal rights of people owned by shareholders, called stockholders Shareholders have limited liability, so can only lose the amount of their investment in the corporation continued

Corporations Corporations have these disadvantages They are complex to form and to dissolve Legal restrictions can limit the corporation’s activities to only those in the original charter There is a lack of privacy of a corporation’s business information They often claim they are taxed too heavily

Types of Corporations Public corporations offer their stock to the general public, usually on national exchanges The stock of a private corporation is not available to the general public S corporations have a limited number of shareholders and may be taxed like sole proprietorships or partnerships Nonprofit corporations exist to provide a social service rather than to make a profit