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Chapter 5 - The Free Enterprise System

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Kori Vagner

on 10 September 2013

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Transcript of Chapter 5 - The Free Enterprise System

Chapter 5 - The Free Enterprise System
Explain the Characteristics of a free enterprise system
Distinguish between price and non-price competition
Explain the theory of supply and demand
Compare for-profit and non-profit organizations
Distinguish between the public and private sectors
List the types of businesses in the industrial market
Free Enterprise Systems
- encourages individuals to start and operate their own businesses in a competitive system, without government involvement.

- freedom to own personal property, to
, to take risks, and to make a profit
Intellectual Property Rights
Intellectual property rights are protected in a free enterprise system and are:
Patents - you alone own item or idea
trademarks - word, name, color, or sound that identifies a good or service
copyrights - authored by an individual, such as writings, music, and artwork
There are two basic strategies that businesses use to compete:
Price competition
- focuses on sale price of product. Ex.) Wal-Mart and Southwest Airlines
non-price competition
- compete based on quality of products, services, financing, location, and reputation. Charge more. Ex.) free shipping and same day delivery
Is this a case of price or non-price competition?
- when there is no competition and one firm controls the market for a given product.

- Monopolies are NOT permitted in a free enterprise system because they prevent competition

Ex.) Microsoft
- potential for loss or failure.

- Starting a company is a risk

- One out of every three businesses in the U.S. fails after one year of operation

- When industry develops and profits great, more people enter industry

- Up to 85% of new products fail in first year
Why do you think that this new coke taste failed?
Economic Costs Versus economic benefits
profits decline = unemployment rises (they have to lay off employees)
rise in unemployment = increase in cost of social services
profits rise = unemployment decreases, government makes more money from taxation, and vendors and suppliers make more, too!
Supply and Demand
- determines the prices and quantities of goods and services produced.

Law of Supply:
price and quantity supplied move in same direction.
Ex.) Prices quantity supplied
Price quantity supplied
Supply and Demand
The Law of Demand:
the economic principle that price and demand move in opposite directions

Price quantity of good demanded
Price quantity of good demanded
When supply and demand INTERACT
Domestic Versus Global
Domestic - sells products only in its own country
Global - sells its products in more than one country
- seeks to make a profit from its operations
- functions like a business, but uses the money made to fund the cause. No taxes. Pay employees, rent, expenses. Ex.) DECA, Make-A-Wish, Red Cross
For-Profit Versus Non-Profit
Public Versus Private
Public Sector
- Government financed agencies. Ex.) Army (federal agency), Social security (social agency), FDA (regulatory agency). ***Public sector purchases 1/3 of all goods and services sold in U.S. each year.***
Private Sector
- Businesses not associated with government agencies.

Industrial and Consumer Markets
Derived Demand - in the industrial market is based on, the demand for consumer goods and services
Ex.) increase in cars causes increase in auto parts.

Wholesalers - obtain goods from manufacturers and resell them to industrial users, other wholesalers, and retailers.

Retailers - buy goods from wholesalers or directly from manufacturers.
The functions of a Business
There are 4 main functions of a business and they are:
Production or Procurement
Production and Procurement
Production - Companies that want to be leaders produce the most innovative products

Procurement - involves buying and re-selling goods that have already been produced.

Marketing, Management, and Finance
Marketing - research helps determine what products to make and/or purchase

Management - process of achieving company goals by effective use of resources through planning, organizing, and controlling

Finance - Money management (financial statements - Balance sheet and Income statement)

- Is the combination of economic analysis for the U.S., Mexico, and Canada
- Creates statistical analysis
- basis for procurement process
- 6 digit code, which is classified into 20 industry sectors
Full transcript