Marketing Essentials Section 3.1 Capitalism n Chapter 3 The Free Enterprise System Section 3.1 Capitalism

Capitalism SECTION 3.1 Basic principles of a free enterprise system What You'll Learn Basic principles of a free enterprise system The role of competition The importance of risk and profit

SECTION 3.1 Capitalism Why It's Important In this chapter, you will develop an understanding of how our economic system operates. You will learn how prices are determined, as well as what roles the government and consumers play in the free enterprise system.

Capitalism SECTION 3.1 free enterprise system competition Key Terms free enterprise system competition price competition nonprice competition monopoly risk profit

Capitalism SECTION 3.1 Basic Principles In the United States, we have the freedom to make decisions about where we work and how we spend our money. A free enterprise system encourages individuals to start and operate their own businesses.

Capitalism SECTION 3.1 Freedom of Ownership Individuals in our free enterprise system are free to own personal property, such as cars, computers, and homes, as well as natural resources such as oil and land. You can buy anything you want as long as it is not prohibited by law. Slide 1 of 3

Capitalism SECTION 3.1 Freedom of Ownership In a free enterprise system people are encouraged to own businesses, but there are restrictions on how and where businesses may operate. Businesses that make things may be forced to comply with certain environmental measures. Businesses may be restricted in where they can locate. Slide 2 of 3

Capitalism SECTION 3.1 Freedom of Ownership If you get a patent on an invention, anyone who wanted to manufacture your product would have to pay you for its use through a licensing agreement. Example: A T-shirt manufacturer gets a licensing agreement with the NFL to produce NFL logo T-shirts. Slide 3 of 3

Capitalism SECTION 3.1 Competition Competition is the struggle between companies for customers. Competition is an essential part of a free enterprise system. It forces businesses to produce better quality goods and services at reasonable prices.

Capitalism SECTION 3.1 Price Competition Price competition focuses on the sale price of a product. The assumption is that, all other things being equal, consumers will buy the products that are lowest in price. Example: Wal-Mart advertises "Always the Lowest Price—Always."

Capitalism SECTION 3.1 Nonprice Competition In nonprice competition, businesses compete based on the quality of the products, service and financing business location reputation the qualifications or expertise of their personnel

Capitalism SECTION 3.1 Monopolies When there is no competition and one firm controls the market for a given product, a monopoly exists. Monopolies are not permitted under a free enterprise system because they prevent competition.

Capitalism SECTION 3.1 Risk Risk is the potential for loss or failure in relation to the potential for improved earnings. As the potential for earnings gets greater, so does the risk.

Capitalism SECTION 3.1 Profit Profit is the money earned from conducting business after all costs and expenses have been paid. Profit is the engine that drives a free enterprise system.

Capitalism SECTION 3.1 Economic Cost of Unprofitable Firms Unprofitable businesses lay off employees. Their stock prices fall, so they have fewer resources and investors lose money. They cut back on research and development. Their suppliers and transporters suffer. The government receives less in taxes and pay more in social services.

Capitalism SECTION 3.1 Economic Benefits of Successful Firms Profitable businesses hire more people. Their investors earn from investing in the company. Their vendors make more money. Companies and employees give more to charities. The government receives more taxes. Competition benefits the consumer.

Section 3.2 Government and Consumer Functions Marketing Essentials n Chapter 3 The Free Enterprise System Section 3.2 Government and Consumer Functions

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions What You'll Learn The roles government plays in our free enterprise system Supply and demand theory

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Why It's Important As a consumer, you need to understand your power to affect the prices you pay for products. As a voter, you have a responsibility to understand how decisions made by the government affect you, your investments, and your life in general.

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Key Terms demand supply equilibrium surpluses shortages

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions The Role of Government The United States is a modified free enterprise system. In such a system, the government acts as: provider of services supporter of business regulator competitor

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Provider of Services To ensure the safety and general welfare of people in the United States, the government provides: military protection police protection fire protection free public education job training roads and bridges public libraries welfare system health care for the elderly and poor

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Supporter of Business The government provides disaster assistance to help both businesses and homeowners rebuild after disasters. The Small Business Administration provides counseling and educational materials to support business. The government is the largest consumer of goods and services in the U.S.

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Regulator In the United States, most laws are designed to protect the safety, health, and welfare of individuals and the freedom of businesses to operate in our free enterprise economic system.

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Regulator: Consumer and Worker Protection The government protects workers and consumers through the following federal agencies: Food and Drug Administration (FDA) Equal Employment Opportunity Commission (EEOC) Occupational Safety and Health Administration (OSHA) Consumer Product Safety Commission (CPSC) Slide 1 of 2

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Regulator: Consumer and Worker Protection Environmental Protection Agency (EPA) The Securities and Exchange Commission (SEC) Slide 2 of 2

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Regulator: Business Protection The government provides laws and regulations regarding patents, copyrights, and trademarks. The government regulates trade with other countries to protect national security and to protect U.S. companies from unfair competition. Slide 1 of 3

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Regulator: Business Protection The Sherman Antitrust Act, passed in 1890, outlawed monopolies in business, protecting competition. The Clayton Antitrust Act, passed in 1914, closed loopholes in the Sherman Antitrust Act. The Federal Trade Commission (FTC) enforces both acts. Slide 2 of 3

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Regulator: Business Protection The Federal Reserve System is the nation's banking system. The Federal Reserve Board of Governors controls interest rates, increasing or decreasing rates to manipulate economic activity and inflation. Slide 3 of 3

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Government as Competitor The federal government runs three businesses: Tennessee Valley Authority provides electricity to the rural South U.S. Postal Service provides national mail delivery Amtrak provides passenger rail service, established under the Rail Passenger Act of 1970.

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions The Role of the Consumer Consumers do two major things in the marketplace: They pick the winners—the products and businesses that will be in the marketplace tomorrow. They determine the demand for any given product, and therefore help determine prices.

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Deciding Which Businesses Survive Consumers decide which businesses will survive by "voting" with each purchase. The more votes (sales) a product gets, the more likely that product or company will survive.

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Determining Prices Prices in a free enterprise system are determined by supply and demand. Supply and demand interact to determine the price customers are willing to pay for the number of products producers are willing to make. Slide 1 of 4

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Determining Prices Demand refers to consumer willingness and ability to buy products. According to the law of demand, if the price is low enough, demand for a product usually increases. Slide 2 of 4

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Determining Prices Supply is the amount of goods producers are willing to make and sell. higher prices = more products for sale lower prices = less products for sale Slide 3 of 4

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Determining Prices Equilibrium exists when the amount of product supplied is equal to the amount of product demanded. Slide 4 of 4

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Surpluses Surpluses of goods occur when supply exceeds demand. When this happens, businesses respond by lowering their prices in order to encourage people to buy more of the product. Example: When grocery stores have lots of produce, they price the produce low to encourage people to buy.

Government and Consumer Functions SECTION 3.2 Government and Consumer Functions Shortages When demand exceeds supply, shortages of products occur. When shortages occur, businesses can raise prices and still sell their merchandise. Example: An oil shortage increases the price of gasoline, so consumers who want to drive their vehicles pay the higher price.

Graphic Organizer 3.2 The Determinants of Demand Demand Existence of Substitutes Prices of Complimentary Goods Tastes and Preferences Demand Changes in Population Income