Chapter 5 The Free Enterprise System

Chapter 5.1 Objectives Explain the Characteristics of a Free Enterprise System   Distinguish between price and nonprice competition Explain the theory of supply and demand

free enterprise system The basis of this system is for people to have the freedom to:   own personal property compete take risks make a profit This system encourages individuals to start and operate their own business in a competitive system, without government involvement.

In general, how are prices determined in this system? How do we classify the U.S. in regards to the free enterprise system?

Freedom of Ownership   As an individual, this means you can: buy stuff sell stuff lease stuff rent stuff give stuff away keep stuff and use it for yourself    ...as long as it is allowed by law!

Business Ownership   Entrepreneurs start and operate businesses they own. Other ways people can own businesses is by investing their money in them, but not working in the business. These people buy shares of stock. A successful company's stock price rises because more people want to buy that stock.  What is this another example of?

Intellectual Property Rights patents                  trademarks                 copyrights      Define each and explain how long each are good for. How does someone else gain permission to use one of these? What is the difference between these intellectual property rights and a trade secret? patents-a government issues exclusive right to make, use, or sell an invention for up 20 years. trademark-a brand name, brand mark, trade name, trade character, or a combination of these elements that is given legal protection by the federal government. It can renewed forever if used by a business. copyright-the exclusive right to reproduce or sell a work authored by an individual, such as writings, music, and artwork. Usually valid for the life of the author PLUS 70 years. To use any of these you must gain permission from the owner. A fee is usually paid as part of a licensing agreement. The difference between these intellectual property rights and a trade secret is that a trade secret is not protected by a patent but rather is guarded by the company that possesses it.

Competition-the struggle for customers   How does competition benefit consumers?     2. How does competition increase our standard of living? What are TWO basic strategies businesses use to compete? 

price competition - focuses on the sale price of a product.  What are some examples of companies that use this strategy?   nonprice competition - focuses competition on factors not related to price. Can you think of examples for this strategy?  As competition increases, many companies try to compete by using both strategies.

monopoly- exclusive control over a product or the means of producing it.   Why do free enterprise systems outlaw monopolies? Discussion: Microsoft and utility companies

business risk- Define it!

business risk- the potential for loss or failure   risk vs. reward  low risk, low reward....high risk, high reward What are some examples of this?

money in the bank vs. money in the stock market Money starting a business can payoff big time, OR a business can fail. 1/3 of every business in the U.S. fails after ONE year!! Liability, natural disasters, increased competition You want to succeed? Make new products!! Not an easy thing...new product introductions are very costly AND as many as 85% of new products fail in the first year!!

profit - money earned from conducting business after all costs and expenses have been paid.  (only 1-5% of sales for most businesses) Profit is the "reward" in the risk vs. reward equation. Profit is the motivation for those who start and operate businesses. That motivation is the key to satisfying customers and running a business efficiently.  

DISCUSS The economic costs of unprofitable firms: worker layoffs money losses for investors stresses on government  

DISCUSS   The economic benefit of successful firms: higher employment, higher wages, better benefits, higher morale investors gain money, which can spur reinvestment increased consumer spending, increaded business opportunities government receives more funds, and needs to provide less assistance

supply-the amount of goods producers are willing to make and sell *the law of supply states that price and quantity supplied move in the same direction   demand-refers to the consumers' willingness and ability to buy products *the law of demand states that price and quantity demanded move in the opposite direction What is the relationship between supply and demand?

  Go to Figure 5.1 on page 107

Supply and Demand-Discuss and provide examples What is the term used when supply exceeds demand?   What is the term used when demand exceeds supply?  What is the term used when demand is equal to supply?  

Chapter 5.2 Objectives Compare for-profit and nonprofit organizations   Distinguish between public and private sectors List the major types of businesses in the industrial market

The Classification of Businesses Size and Scope Purpose Industry and Markets

Size and Scope Large vs. Small More than 1000 employees Less than 100 employees     -about 95% are classified as small businesses     - employ > 1/2 of the private sector workforce 

Size & Scope Domestic vs. Global Domestic business- Define it! Global business- Define it

Purpose For-profit vs. Nonprofit Organizations For-profit business-Define it Nonprofit organization-Define it

public sector-Define it....Give some examples Purpose Public vs. Private public sector-Define it....Give some examples -purchase 1/3 of all goods and services sold in the U.S. each year. private sector-Define it...Give some examples

Businesses are classified according to: Industry and Markets Businesses are classified according to: the industry they represent the products they sell the markets they target NAICS-What does this stand for? Industry-consists of a group of establishments primarily engaged in producing or handling the same product or group of products or in rendering the same services.

Businesses are classified according to: Industry and Markets Businesses are classified according to: the industry they represent the products they sell the markets they target Consumer, Industrial, and Service Markets The relationship between consumer and industrial markets can best be explained by the concept of derived demand. What is derived demand?

Derived demand in the industrial market is based on, (or "derived from") the demand for consumer goods and services

Types of businesses in the industrial market extractors (agriculture, mining, fishing, forestry) construction (homes, commercial buildings) manufacturing (goods produced and sold to others) wholesalers-obtain goods from manufacturers and resell them to industrial users, other wholesalers, and retailers retailers-buy goods from wholesalers or directly from manufacturers and resell them to the consumer service related (intangible products-insurance, housekeeping, accounting, marketing, doctors, dentists, lawyers

The Functions of Business All of these things functions must be looked at as part of a SWOT analysis production-the process of creating, expanding, manufacturing, or improving on goods and services What are some different examples of production?

The Functions of Business All of these things functions must be looked at as part of a SWOT analysis production-the process of creating, expanding, manufacturing, or improving on goods and services What are some different examples of production? Songwriter creates new music Farmer grows crops Ford manufactures new cars Software developers write new programs

The Functions of Business All of these things functions must be looked at as part of a SWOT analysis production-the process of creating, expanding, manufacturing, or improving on goods and services What is looked at in evaluating this function?

The Functions of Business production-the process of creating, expanding, manufacturing, or improving on goods and services What is looked at in evaluating this function? Innovation Speed to market Efficiency Level of success with products

The Functions of Business All of these things functions must be looked at as part of a SWOT analysis procurement-involves buying and reselling goods that have already been produced SWOT Analysis, Wholesalers, and Retailers- evaluating wholesalers and retailers on their merchandising ability. What are the five "rights" of merchandising?

Marketing-all the activities that take place from the time a product leaves the manufacturer until it reaches the final consumer The role of marketing activities- research pricing  promoting selling Evaluate the four Ps in relation to your target market, company objectives, and sales performance.

management- the process of achieving company goals by effective use of resources through planning, organizing, and controlling Explain: planning organizing controlling

A SWOT Analysis of this function focuses management- the process of achieving company goals by effective use of resources through planning, organizing, and controlling A SWOT Analysis of this function focuses on the evaluation of the personnel who run the company.

Finance and Accounting Finance-the function of business that involves money management  Accounting-the discipline that keeps track of a company's financial situation Important Documents to Analyze Balance sheet P & L  Cash flow statement