The Free Enterprise Chapter Analyze the Free Enterprise

Our Basic Economic Freedoms Freedom of Ownership –Personal Items, businesses, private property, Intellectual property Freedom to Compete Freedom to Take a Risk Freedom to Make a Profit –Profit is the driving motive in our economy

Intellectual Property Rights Patent: Invention for up to 20 years Trademark: word, name, symbol or color identifying a business or product – life of business Copyright: writings, music, artwork for life of author plus 70 years

Competition Struggle between companies for customers Benefits: –Lower Prices –Better Quality

Two Types of Competition PRICE Focuses on the sale price of a product NONPRICE Compete on the basis of factors not related to price - services - location - reputation, etc.

Monopoly There is no competition and one firm controls the market for a given product. Gives exclusive control over a product or means of production –Microsoft = Technology dominance NOT LEGAL IN A DEMOCRACY –Exception = utilities

Risk = Profit Risk = The potential for loss or failure. –Money, investments, reputation, –85% of new product fail in first year! You must take risk in order to earn profit Profit is the money earned after all costs and expenses have been paid. –1-5% of sales Profit provides the incentive for a person to take risk.

How are prices determined in our market place? The interaction of Supply and Demand! 2.6 Evaluate the relationship of cost/profit to supply/demand

Law of Demand DEMAND: consumers’ willingness and ability to buy products The lower prices create higher demand; higher prices have a lower demand Exception to the Law: Diminishing Marginal Utility: Consumers will buy just so much of a given product

Elasticity of Demand (2 types) Elastic Demand – Slight change in $ price $ = creates a LARGE change in demand –Products are items of WANT, not in urgent need, substitutes are available Inelastic Demand – Changes in $price$ = creates very little change in demand –Products are necessities, in urgent need, have no available substitutes

Law of Supply SUPPLY: The amount of goods producers are willing to make and sell At higher prices, producers will offer a large quantity of products for sale; at lower prices, producers offer fewer products for sale

Supply and Demand Theory Terms to know! Equilibrium: The point at which Supply and Demand are equal –The goal!! Surplus: Supply exceeds Demand; Prices will typically lower to reach demand (equilibrium) Shortage: Demand exceeds Supply; Prices will generally rise until producers can meet the demand (equilibrium)