Chapter 3 ~ The Free Enterprise System Objectives Basic principles of a free enterprise system The role of Competition The importance of risk and profit

3.1 Capitalism In the United States we have the freedom to make decisions about: Where we want to work Who we want to represent us in government Freedom of choice

Free Enterprise System The Free Enterprise System (theory) encourages people to start and operate their own business without government involvement We have a Modified System – the government does intervene on a limited basis to protect us while still supporting the basic principles of free enterprise

Freedom of Ownership We are free to own: Personal property – cars, homes, cell phones etc. Natural Resources and land – Oil and land We can buy whatever we want as long as its legal We can do what we want with our property (!) sell it, lease it, or give it away

Freedom of Ownership The free enterprise system encourages us to own businesses; however there are some restrictions on how and where we can operate them Most businesses are zoned out of areas where there is private housing Businesses must comply with certain environmental regulations Intellectual property rights and licensing agreements will be discussed at a later time

Competition The struggle between companies for customers; its essential to the free enterprise system. Attracts new customers and keeps existing ones Forces businesses to produce higher quality goods and services at reasonable prices Results in new and improved products and a wider selection of goods and services Results of competition increase the nation’s output of goods and services and its standard of living

Competition ~ Price and Non Price Price Competition: Focuses on the price of a product; assuming all other things are equal, consumers will buy the product/service at cheapest price Price is always stressed in their advertisements Burlington Coat Factory, Ross, Marshalls, Homegoods, and Biglots

Competition ~ Price and Non Price Businesses compete on factors not based on price; quality of the goods, financing, location, reputation and sales expertise Nordstroms, Macy’s, Bloomindales, Lord and Taylor Some companies don’t always use one strategy over another. Its not uncommon for a business to use both approaches to get the customer Grocery Stores now have pharmacy’s, dry-cleaning, café’s, floral departments, photo departments, delivery services, etc. Discount Stores like Target and Walmart now carry food items; frozen, ready to eat, etc. The services that these stores offer are intended for one-stop shopping

Monopolies Exclusive control over a product or the means of producing it. Not allowed under the free enterprise system, unless regulated There is no competition when one firm controls the market for a given product Without competition there is nothing stopping a company from acting without regard to consumer wants and needs, companies can charge whatever they want, control the quality of the product and decide who gets it

Regulated Monopolies There are only a few! The government has allowed some industries to control one product when it would be wasteful to have more than one firm Currently, Utility companies are being deregulated; PSE&G AT&T ~ use to be the only phone provider; it was broke up in 1982 How many phone companies can you think of?

Risk The potential for loss or failure when you want to own your own business. (You also have the potential to make a lot of money!) Risk is always a factor with private ownership Usually, the higher the potential for earnings are, the higher the risk 1 out of 3 businesses fail within the first year of operation in the United States When an industry develops, more people enter it so the competition becomes greater

Risk continued………. There is also risk involved in developing new products; it’s very expensive to introduce new products 85% of new products fail within the first year

Profit ~ Yay!! Profit is the money earned from conducting business after all costs and expenses have been paid The concept of profit is the driving force in a free enterprise system The range of profit for most businesses is 1 to 5% of sales; the remaining percent (95 to 99) pays the operating costs of the business, expenses and taxes! Obviously, profits remain high when sales are high (demand) and costs are low

When a business isn’t successful…. Usually the first thing done is laying off employees If corporations lose money the investors lose if their stock value goes below the price paid for it; stock is sold and there are fewer resources R&D is stopped Ripple effect in the other industries needed for that business suppliers lose, transportation companies lose Everyone loses when a business fails

When a business is Successful…. More people are hired and morale is high; customers/consumers will also spend more money There is more money discretionary income to spend on luxury items Investors earn money on their stocks so they may buy more shares Vendors and Suppliers make money The government makes more money on increased taxes Business and people are more likely to donate to charity

In Review objectives In your notebook, answer the following about The Free Enterprise System: 1. What are the basic principles of our (modified) system? 2. What is the role of Competition? 3. What is the importance of risk and profit?

3.2 Government and Consumer Functions ~ Objectives The roles government plays in our free enterprise system The theory of supply and demand

Government Involvement Our government provides four roles in our modified free enterprise system Provides general services – military, law enforcement, fire protection, roads, bridges, libraries, social welfare system, Medicare and Medicaid, disaster assistance All paid through our taxes

2. Supports Businesses Small Business Administration SBA Helps small businesses with loans and other services Establishes trade alliances with other countries Largest consumer of goods and services

State and Local Level Requires licensing for hairstylists and manicurists Restaurant Inspectors Mandates minimum wage practices Investigates Fraudulent business Provides laws and regulations for copyrights, patents and trademarks Will impose trade restrictions with other countries if necessary Securities and Exchange Commission – SEC, regulates the sale of stocks and bonds Licensing of financial advisors and brokerage firms

State and Local Level Regulates industry Making laws is one of the principal functions of government; their designed to protect the health, safety and welfare of individuals and businesses Laws passed to regulate how businesses operate: Sherman Antitrust Act – (1890) Prevents monopolies and predatory pricing; one company cannot under-charge for a product that would put their competition out of business

State and Local Level Clayton Antitrust Act – (1914) Reduces loopholes in the Sherman Antitrust Act Federal Trade Commission –FTC –Established the same year to enforce both laws; they since expanded to investigate deceptive business and advertising practices Federal Reserve System – regulates economic stability of businesses and our banking system

Consumer and Worker Protection Food and Drug Administration – FDA Regulates food and drug labeling Equal Employment Opportunity Commission – EEOC Occupational Safety and Health Administration – OSHA Regulates workplace safety and health Consumer Product and Safety Commission – CPSP Regulates products that are unsafe Environmental Protection Agency – EPA Regulates and protects our environment

4. Competitor The government also acts a competitor: TVA – Tennessee Valley Authority Provides electricity to parts of the south. Was established during the Great Depression because businesses were not willing to invest in damns and power plants U.S. Postal Service – Provides mail service nationwide. Is currently going under due to competition and Email; Saturday delivery may be stopped Amtrak – Passenger Rail System – businesses no longer wanted to offer train service Our government also runs state parks and campgrounds

The Role of the Consumer in the Free Enterprise System Most of the goods and services produced in the United States are bought by consumers for personal use. Consumers do two major things: 1.They (we) pick the winners of the products and services that will be successful in the marketplace 2. Determine Demand for any given product which in turn, determines prices We are known as a consumer-oriented society; we have the power to decide which products will be produced and which companies stay in business ……………..

Determining Prices Supply and Demand In theory, Supply and Demand determine prices and products in a market economy. Supply – The amount of goods producers are willing to make and sell Law of Supply – The higher the price of a product the more willing producers are to make it because it’s a higher profit for them

Determining Prices Supply and Demand Demand – Consumer willingness and ability to buy products. Law of Demand is the theory that as price increases, demand decreases These conditions often determine whether prices go up, down, or stay the same

Supply and Demand Surplus occurs if supply of products exceeds the demand of the products; sale prices usually result. Shortages occur if the demand for products exceeds supply; business can demand higher prices. Equilibrium – exists when the product being supplied equals the amount being demanded. Win-Win Situation Everyone's needs and wants are satisfied in the most efficient way possible