1. Free Market systems, competition & supply and Demand concepts
Unit 4.01
Free Market systems, competition & supply and Demand concepts

2. Objectives Identify economic products as either goods or services.
Describe the role of profit, competition, and supply and demand in the free-market system.
Distinguish between the main competitive market structures.
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3. Objectives List the basic forms of business organizations.
Describe the concept of business cycles.
Explain the concepts of marketing and merchandising.

4. Chapter 3
The Fashion Industry
Fashion is a complex, multibillion-dollar industry with millions of employees
Manufacturers are companies that make goods
Retailers are companies that sell merchandise to consumers
Consumers are people who buy and use the finished products, such as apparel

5. The Fashion Industry
The fashion industry includes all the businesses connected with designing, manufacturing, distributing, promoting, and selling textile and apparel products
Goods are tangible, or real, items that are physically made by manufacturers
Garments and accessories are examples of finished goods
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6. The Fashion Industry
Services are intangible activities performed for people
Retailers perform services by
buying finished items to sell to consumers
providing stores in which shoppers can buy goods that were manufactured elsewhere
Fashion goods and services are constantly changing to meet consumer needs

7. The Free-Market System
In the United States, products are bought and sold in a market economy
The economy operates as a free-market system, meaning that
people freely choose how to spend their money
sellers can charge any price and sell to anyone
profit is the key motivation

8. Profit Motivation
Profit is money left over after expenses and taxes are deducted from the company’s sales of goods or services
Profits determine whether a business succeeds or fails
A business with high profits is considered to be more successful than one with low profits

9. The Significance of Competition
In a free-market system, many companies may be selling the same or a similar product
Competition is rivalry among businesses to gain a larger share of the total market sales
Competition encourages
higher quality and more varied goods and services
lower prices to consumers

10. The Supply and Demand Relationship
When considering a good or service in economic terms,
supply refers to the quantities that producers are willing and able to provide
demand refers to the quantities that consumers are willing and able to buy
Quantities of specific goods and services supplied and demanded continuously interact
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11. The Supply and Demand Relationship
The supply and demand relationship affects prices in these ways
People will pay more for items in short supply
Companies that make and sell a limited item can charge a higher price for it and make more profit
Sellers of widely available products will have to sell at lower prices and less profit per item
When demand for an item goes down, so does its price because not very many people want it
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12. The Supply and Demand Relationship
The forces of supply and demand combine with the profit motive to regulate what is produced and in what amounts
The balance between them is reflected by current prices on the open market
In theory, consumers get what they want and producers earn a profit by keeping up with public demand

13. Impacts on Society
The free-market system uses a minimum amount of resources to achieve a maximum standard of living for consumers
In this situation, both suppliers and consumers benefit
All resources, or industrial materials and manufacturing capabilities, are scarce
Resources are used as sparingly as possible by businesses to keep prices low
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14. Impacts on Society A standard of living indicates the way people live
It is based on the kinds and quality of goods and services people can afford
In a free-market system, different products are offered at many different price levels
This enables people to satisfy their needs and wants in the best ways

15. Competitive Market Structures
In theory, the ideal market structure is pure competition, which has these characteristics:
no single company in an industry is large or powerful enough to influence or control prices
companies are free to enter or exit the industry without any pressure or restraints
a company’s existence in or out of the market does not have much effect on the market
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16. Competitive Market Structures
A monopoly is a market structure opposite to pure competition
A monopoly is a market in which
there are no direct competitors
only one company offers a given good or service for sale and it has total control over products and prices
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17. Competitive Market Structures
True monopolies are prohibited in the United States by antitrust legislation
There are no textile or apparel monopolies
Monopolies usually have lower costs per item for their products because of economies of scale
Economies of scale are cost reductions resulting from large-scale mass production
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18. Competitive Market Structures
The market structure of an oligopoly is between that of pure competition and a monopoly
Oligopolies have only a few large rival firms offering the same type of product
These firms dominate the market for that product and usually react to each other’s actions
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19. Competitive Market Structures
The U.S. government has the power to prevent mergers of firms that would reduce competition in an industry
In the market structure of oligopoly, it is hard for new firms to enter the industry
Fashion companies do not exist as oligopolies
All industries fall between the two extremes of pure competition and monopoly

20. Basic Forms of Business Organizations
The three most common types of company ownership in the free-market system are
sole proprietorships
partnerships
corporations
Each form has advantages and disadvantages

21. Sole Proprietorships
Sole proprietorships are business owned by one person, such as a small fashion shop
The owner
has freedom, independence, and flexibility in running the business
controls all the profit received by the business
has the major risk of being liable for all the debts
Sole proprietorships have few government regulations

22. Partnerships
Partnerships are unincorporated businesses co-owned and operated by two or more persons
They are easy and inexpensive to form
In general, partnerships have
higher profit potential than sole proprietorships
higher credit ratings
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23. Partnerships The disadvantages of partnerships are
unlimited liability of the partners
the potential for conflict between the partners
possible management confusion with more than one person having a say in the daily operations of the business

24. Corporations Corporations are separate legal entities Corporations are
chartered enterprises with many of the legal rights of people
owned by shareholders, called stockholders
Shareholders have limited liability, so can only lose the amount of their investment in the corporation
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25. Corporations Corporations have these disadvantages
They are complex to form and to dissolve
Legal restrictions can limit the corporation’s activities to only those in the original charter
There is a lack of privacy of a corporation’s business information
They often claim they are taxed too heavily

26. Types of Corporations
Public corporations offer their stock to the general public, usually on national exchanges
The stock of a private corporation is not available to the general public
S corporations have a limited number of shareholders and may be taxed like sole proprietorships or partnerships
Nonprofit corporations exist to provide a social service rather than to make a profit