Free Enterprise

What is Free Enterprise? Encouraging private ownership and individual initiative (independently outside of influence or control)‏

Tradition of Free Enterprise America is considered the “land of opportunity” History of social and political commitment to entrepreneurship and competition in the marketplace. Examples: Rockefeller, Carnegie, Henry Ford

Basic Principles of Free Enterprise 1. Profit Motive Encourages Individuals to take the risk of investing in business Individuals make decisions that will maximize profits Requires financial discipline = individuals are responsible for success or failure Rewards innovation Allows creative companies to grow Improves productivity = higher profits to more efficient company

Basic Principles of Free Enterprise 2. Open Opportunity EVERYONE can compete in the marketplace 3. Economic Rights - Legal equality = everyone has the same legal rights - Private property rights = you control your possessions as you wish. - Free contract - Voluntary exchange = you decide what and when to buy and sell

Role of Government 4. Copyrights – Grants an author exclusive rights to publish and sell their work. Piracy: Downloading of music, burning CD’s (Examples: Napster, Limewire etc.)‏ 5. Patent – Gives inventor exclusive right to produce and sell a product for 20 years.

Review What Economic Philosopher would agree with the free enterprise system? Why? How is a patent different than a copyright? What is the Number 1 motive people have to enter into the free market system? What risk do Entrepreneurs take to enter the free market?

Factors that Effect Economic Decisions Productivity: The value of output produced Production: The creation of value or the producing of articles that have exchange value.

BUYERS & SELLERS COME TOGETHER TO EXCHANGE THINGS OF VALUE Consumption The amount of goods and services used Goods- Products Services- things provided BUYERS = CONSUMERS SELLERS = PRODUCERS BUYERS & SELLERS COME TOGETHER TO EXCHANGE THINGS OF VALUE

Specialization: Focusing your efforts on a limited number of activities Doctors, Teachers, Lawyers Efficiency: Performing in the best possible manner with the least waste of time and resources Division of Labor: Each person is given a specific task to repeat over and over again. Henry Ford…assembly line

Competition in the Marketplace

MONOPOLY ONLY ONE PRODUCER NO COMPETITION CHARGE HIGHER PRICES PRODUCE LESS PROVIDE LESS QUALITY (WHY?) What is an example of a current monopoly?

OLIGOPOLY Only a few producers Operate between competitive markets and monopolies Examples: Utilities (what are they?) Utilities: Natural Gas, Electricity

CONGLOMERATES: Large Companies that combine to form larger companies Example: General Electric (GE) – They own NBC, financial services and health care services Multi-National Conglomerators: CONGLOMERATE with companies operating in more than one country. Example: BP (British Petroleum)

MERGER The process when one firm buys/joins with another. Horizontal Merger- Joins two or more firms competing in the same market with the same good or service. Vertical Merger - Joins two or more firms involved in different stages of producing the same good or service. A vertical merger can allow a firm to operate more efficiently. An example of a vertical merger is a car manufacturer purchasing a tire company.

Market Structure Competition The rivalry between sellers to attract customers while lowering costs Cooperation the combination of persons for purposes of production, purchase, or distribution for their joint benefit

Review Why do Monopolies tend to produce less output, charge higher prices, and provide less quality than competitive markets? What is the difference between competition & cooperation? There is no competition