1. Market-Oriented Economic Systems
Chapter 5 The Free Enterprise System
Market-Oriented Economic Systems
Section 5.1 Market-Oriented Economic Systems
Section 5.2 Business Opportunities

2. Maket-Oriented Economic Systems
Objectives
Explain the characteristics of a free enterprise system
Distinguish between price and nonprice competition
Explain the theory of supply and demand
Marketing Essentials Chapter 5, Section 5.1

3. Market-Oriented Economic Systems
A free enterprise system X encourages individuals to start and operate their own businesses in a competitive system, without government involvement
Marketing Essentials Chapter 5, Section 5.1

4. Free Enterprise Systems

5. Basic Principles of Free Enterprise
Freedom to Own Personal Property
Freedom to Compete
Freedom to take risks
Freedom to make a profit

6. 1. Freedom of Ownership
Free enterprise system enables us to own the following:
Personal property
Businesses
Intellectual Property

7. A. Personal Property
A Free enterprise system enables us to own personal property:
Cars,
Computers
Homes
Natural resources (oil and land)
Buy want you want as long as not prohibited by law
Do what you want with property – give it away, lease it, sell it, or use it

8. B. Business Ownership
Entrepreneurs People who have started and own their own businesses
Stockholders Others not involved in running a business but support businesses by investing their money in parts or shares of the company

9. C. Intellectual property rights
Intellectual property rights: The ownership of ideas and control over the tangible use of those ideas through protection under federal and state law.
Ex: copyrightable works, ideas, discoveries, and inventions

10. Three Types of Intellectual Property
patent X A document granting an inventor sole rights to an item or an idea on an invention
20 year protection: would have to pay the patent holder through a licensing agreement to produce
2. trademark X A word, name, symbol, sound, brand name, brand mark, trade name, trade character, color, or a combination of these elements that identifies a good or service and cannot be used by anyone but the owner because it is registered with the federal government and has legal protection
Lifetime protection: renewed indefinitely as long as it is being used by a business

11. Three Types of Intellectual Property
3. A copyright X involves anything that is authored by an individual, giving the author exclusive rights to reproduce or sell the work. Such works can be:
Writings (books, articles, etc.)
Music
Artwork
Author’s life + 70 year protection: A copyright usually lasts for the author’s life plus seventy years

12. 2. Freedom of Competition
competition X struggle between businesses to gain and keep customers
There are two basic ways businesses compete:
Price competition
Non-price competition

13. Two Ways Businesses Compete
1. Price competition X a company focuses on distinguishing its products from the competition on the basis of low price. (This assumes, all other things being equal, consumers will buy the products lowest in price)
Ex: through Sales and rebates
Focus on lowest prices (Wal-mart, Southwest Airlines)

14. Two Ways Businesses Compete
1. Non-price competition X a company distinguished its products from the competition in areas other than price, such as:
Quality of the products
Service
Financing
Business location
Reputation

15. Monopoly
A monopoly X is exclusive control by one firm over a product or the means of producing it
Monopolies are not permitted in a free enterprise system because they prevent competition

16. Monopoly
Monopoly

17. 3. Freedom to take a Risk
Business risk is the potential for loss or failure
As the potential earnings increase, so does the risk
Some risks businesses take include:
Competition
Starting up – 1 of 3 new business fail in first year
Investing in the development of new products
85% of new products fail in the first year
Natural disasters
Marketing Essentials Chapter 5, Section 5.1

18. 4. Freedom to make a Profit
Profit X the money earned from conducting business after all costs and expenses have been paid
Profit is the motivation for taking the risk of starting a business
1% - 5% of total sales is profit for most businesses
95% - 99% of sales pays costs, expenses and business taxes
Profits help the economy because they encourage:
Competition and product development in hopes of earning a profit

19. Supply and Demand
In free enterprise, supply and demand determine the prices and quantities of goods and services
Supply X is the amount of goods producers are willing to make and sell
The law of supply is that price and quantity supplied move in the same direction
As prices rise
quantity produced rises
As prices fall
quantity produced falls

20. Supply and Demand
Demand X refers to consumer willingness and ability to buy products
The law of demand is that price and demand move in opposite directions
As prices increase
the quantity demanded decreases
As prices decrease
quantity demanded increases

21. When supply and demand interact, three conditions are created:
Surplus: Supply exceeds demand
What happens to price?
Price too high, demand decreases and must offer sales and promotions
Shortage: Demand exceeds supply
What happens with price?
Can raise prices and still sell the product
Equilibrium: Supply equals demand
What happens?
Everyone is happy

22. What is the equilibrium price if this is where supply and demand meet?
$30 price, $30 quantity
Surplus
Shortage
Surplus
Supply > Demand
Where is this on the chart?
Shortage
Demand > Supply
Where is this on the Chart?

23. Market-Oriented Economic Systems
Study Organizer
What are the four characteristics of a free enterprise system.