CHAPTER 3: THE FREE ENTERPRISE SYSTEM #money

I. BASIC ECONOMIC FREEDOMS A FREE ENTERPRISE SYSTEM IS DEVISED OF 5 BASIC ECONOMIC FREEDOMS

FREEDOM!!! 1. FREEDOM TO OWN PRIVATE PROPERTY 2. FREEDOM TO OWN A BUSINESS 3. FREEDOM TO COMPETE 4. FREEDOM TO MAKE A PROFIT 5. FREEDOM OF CHOICE 1/3 Businesses will fail

II. COMPETITION A STRUGGLE BETWEEN COMPANIES TO GAIN CUSTOMERS COMPETITION IS BENIFICIAL AND HEALTHY FOR THE ECONOMY

A. PRICE AND NON-PRICE COMPETITION

1. PRICE COMPETITION- FOCUSES ON SALE PRICE OF PRODUCT 1. PRICE COMPETITION- FOCUSES ON SALE PRICE OF PRODUCT. IF ALL OTHER THINGS ARE EQUAL THE CUSTOMER WILL NORMALLY BUY THAT WHICH IS LESS EXPENSIVE.

2. NON-PRICE COMPETITION- WHEN BUSINESSES CHOOSE TO COMPETE ON BASIS OF OTHER FACOTRS THAT ARE NOT RELATED TO PRICE. EX. QUALITY, LOCATION, REPUTATION

B. MONOPOLIES WHEN ONE FIRM CONTROL THE WHOLE MARKET AND IS THE SOLE DISTRIBUTOR. THEY ARE ILLEGAL BECAUSE THERE IS NO COMPETITION.

SOME MONOPLOIES ARE GOVERNMENT RUN. (UTILITIES, GAS, ELECTRIC) SOME MONOPLOIES ARE GOVERNMENT RUN. (UTILITIES, GAS, ELECTRIC). THEY MUST GET PERMISSION TO INCREASE RATES.

C. BENEFITS OF COMPETITION 1. BUSINESSES KEEP PRICES LOW 2 C. BENEFITS OF COMPETITION 1. BUSINESSES KEEP PRICES LOW 2. BUSINESSES OFFER BETTER QUALITY 3. INCREASES THE NATIONS PRODUCTIVITY AND LIVING STANDARD

III. THE ROLE OF GOVERNMENT THE GOVERNMENT PLAYS FOUR MAIN ROLES IN OUR FREE ENTERPRISE SYSTEM: Provider of Services Supporter of Businesses Regulator Competitor THE FEDERAL GOVERNMENT IS THE LARGEST CONSUMER OF GOODS AND SERVICES

IV. ROLE OF THE CONSUMER CONSUMERS DO TWO IMPORTANT THINGS FOR BUSINESS:

A. THEY PICK THE WINNERS- THE PRODUCTS AND BUSINESSES THAT WILL MAKE IT

B. DETERMINE THE DEMAND FOR ANY GIVEN PRODUCT B. DETERMINE THE DEMAND FOR ANY GIVEN PRODUCT. THERE ARE TWO TYPES OF DEMAND:

1. ELASTIC DEMAND- REFERS TO SITUATIONS WHEN A SLIGHT CHANGE IN PRICE CREATES A LARGE CHANGE IN DEMAND. AS PRICE DECREASES, SIGNIFICANT CHANGES IN DEMAND ARE NOTED. (WANT)

2. INELASTIC DEMAND- CHANGE IN PRICE HAS VERY LITTLE EFFECT ON THE DEMAND FOR A PRODUCT. IF PRICE INCREASES WE WOULD STILL BUY THE PRODUCT. IF PRICE DECREASES THERE IS SO MUCH WE CAN BUY.(NEEDS)

C. FOUR FACTORS THAT INDICATE. WHETHER A PRODUCT IS LIKELY C. FOUR FACTORS THAT INDICATE WHETHER A PRODUCT IS LIKELY TO HAVE ELASTIC OR INELASTIC DEMAND ARE:

1. AVAILABILITY OF SUBSTITUTE- WHEN SUBS ARE AVAILABLE DEMAND IS MORE ELASTIC, WHEN THERE ARE NOT ANY SUBS THEN THE PRODUCT WOULD BE INELASTIC.

2. PRICE RELATIVE TO INCOME- PRICE OF A PRODUCT IS LARGE PORTION OF INCOME(ELASTIC) IF PRICE OF PRODUCT IS SMALL PORTION OF INCOME (INELASTIC)

3. CLASSIFICATION AS NEED OR WANT- IF THE PRODUCT IS A LUXURY ITEM IT IS ELASTIC IF ITEM IS A NECESSITY THEN IT IS INELASTIC

4. IMMEDIACY OF PURCHASE- IF THE PURCHASE MUST BE MADE IMMEDIATELY THE DEMAND TENDS TO BE ELASTIC

V. SUPPLY AND DEMAND SUPPLY AND DEMAND HELP DETERMINE PRICES

A. LAW OF DEMAND CONSUMERS WILLINGNESS AND ABILITY TO BUY PRODUCTS A. LAW OF DEMAND CONSUMERS WILLINGNESS AND ABILITY TO BUY PRODUCTS. IF THE PRICE IS LOW ENOUGH DEMAND INCREASES. HIGHER PRICES LOWER DEMAND.

B. SUPPLY THE AMOUNT OF GOODS PRODUCERS ARE WILLING TO MAKE AND SELL B. SUPPLY THE AMOUNT OF GOODS PRODUCERS ARE WILLING TO MAKE AND SELL. A HIGHER PRICE WILL OFFER A LARGER QUANTITY FOR SALE.