Market Oriented Economic Systems

Basic Principles Individuals should have freedom of choice  Elect people to represent us in government  Where we work  How we spend our money  PURCHASE good and services  Invest in banks or businesses

Free Enterprise Basis - Freedom to:  Own personal property  Compete  Take risks  Make a profit Encourages individuals to start and operate their own business in a competitive system without government involvement  The marketplace determines prices through supply/demand  Us is modified – the government does intervene to protect citizens

Ownership Personal Property Cars, computers, homes Natural Resources Oil, land Businesses Entrepreneurs, stockholders Intellectual Property Patent, trademark, copyright, trade secret

Intellectual Property Also know as “I.P.” I.P. is/ are ideas that have value in a free enterprise system Patent – invention – you own the rights to that item or idea. Once patent is granted, exclusive rights for 20 years ® Trademark – word, name, symbol, sound, color that identifies a good or service. Can be renewed forever. TM Copyright – writings, music, artwork – author gets exclusive right to reproduce or sell the work. Life + 70 years © Trade Secret – information that a company keeps and protects for it’s use only. When a company wants to use another’s name, symbol, creative work, or product it must get permission and pay for the use.

Competition The struggle between businesses to gain customers Forces business to produce better-quality goods and services at reasonable prices Results in a wider selection of products The absence of competition is called Monopoly Exclusive control over a product or the means of producing it One firm controls the market for a product A company can charge whatever it wants Controls the quality of the product and who can get it

Price vs. Non-Price Competition Price Competition focuses on offering products for a lower __________ Non-Price Competition focuses on offering products based on factors such as quality, service, financing, location and reputation. May charge more for their products than competitors do Company’s reliability, tradition, free shipping, same-day delivery

Risk Along with the benefits of owning a business also comes risk (or business risk) The potential for loss or failure Potential for earning = risk Risk of being sued or having name tarnished by bad publicity As competition increases the risk for individual firms goes up too Development of new products – 85% of new products fail in the first year

Profit The goal of operating a business is to earn a profit Profit is the money earned from conducting business after all costs and expenses have been paid  The range of profit is 1% to 5% of sales; the remaining % foes to pay costs, expenses, and business taxes Profit is the motivation for taking risk and starting a business Profits may be used to pay stockholders or they can be reinvested into the business High Sales and Low Costs = Higher Profit

Supply and Demand Determines the prices and quantities of goods and services in a market-oriented economy SUPPLY – the amount of goods producers are willing to make and sell  As prices rise the quantity supplied rises  As prices fall the quantity supplied falls  Suppliers want to supply larger amount of goods at higher prices so their business can be more profitable DEMAND – consumer willingness and ability to buy products  As the price increases the quantity demanded falls  As the price falls the quantity demanded increases

Supply and Demand Surplus – supply > demand  If a price is too high, or seems unreasonable, customers may decide not to buy it (produce) Shortage – demand > supply  When this occurs, a business can raise their prices and still sell their merchandise (gas) Equilibrium – supply = demand  Everyone wins! Customers can purchase goods/services at a fair price and retailers experience a steady flow of business