chapter 3 the free enterprise system 1 section 3.1 capitalism marketing essentials
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Chapter 3 The Free Enterprise System 1
Chapter 3 The Free Enterprise System
Section 3.1 Capitalism
Marketing EssentialsMarketing Essentials
Chapter 3 The Free Enterprise System 2
SECTION 3.1SECTION 3.1
What You'll LearnWhat You'll Learn
Basic principles of a free enterprise system
The role of competition
The importance of risk and profit
CapitalismCapitalism
Chapter 3 The Free Enterprise System 3
SECTION 3.1SECTION 3.1CapitalismCapitalism
Why It's ImportantWhy It's Important
In this chapter, you will develop an understanding of how our economic system operates. You will learn how prices are determined, as well as what roles the government and consumers play in the free enterprise system.
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Key TermsKey Terms
free enterprise system
competition
price competition
nonprice competition
monopoly
risk
profit
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In the United States, we have the freedom to make decisions about where we work and how we spend our money.
A free enterprise system encourages individuals to start and operate their own businesses.
Basic Principles
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Individuals in our free enterprise system are free to own personal property, such as cars, computers, and homes, as well as natural resources such as oil and land. You can buy anything you want as long as it is not prohibited by law.
Freedom of Ownership
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In a free enterprise system people are encouraged to own businesses, but there are restrictions on how and where businesses may operate.
Freedom of Ownership
Businesses that make things may be forced to comply with certain environmental measures.
Businesses may be restricted in where they can locate.
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If you get a patent on an invention, anyone who wanted to manufacture your product would have to pay you for its use through a licensing agreement.
Freedom of Ownership
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Example: A T-shirt manufacturer gets a licensing agreement with the NFL to produce NFL logo T-shirts.
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Competition is the struggle between companies for customers. Competition is an essential part of a free enterprise system. It forces businesses to produce better quality goods and services at reasonable prices.
Competition
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Price competition focuses on the sale price of a product. The assumption is that, all other things being equal, consumers will buy the products that are lowest in price.
Price Competition
Example: Wal-Mart advertises "Always the Lowest Price—Always."
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In nonprice competition, businesses compete based on
Nonprice Competition
the quality of the products, service and financing
business location reputation the qualifications or expertise of
their personnel
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When there is no competition and one firm controls the market for a given product, a monopoly exists.
Monopolies are not permitted under a free enterprise system because they prevent competition.
Monopolies
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Risk is the potential for loss or failure in relation to the potential for improved earnings.
As the potential for earnings gets greater, so does the risk.
Risk
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Profit is the money earned from conducting business after all costs and expenses have been paid.
Profit is the engine that drives a free enterprise system.
Profit
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Economic Cost of Unprofitable Firms
Unprofitable businesses lay off employees.
Their stock prices fall, so they have fewerresources and investors lose money.
They cut back on research and development.
Their suppliers and transporters suffer.
The government receives less in taxes and pay more in social services.
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Economic Benefits of Successful Firms
Profitable businesses hire more people.
Their investors earn from investing in the company.
Their vendors make more money.
Companies and employees give more to charities.
The government receives more taxes.
Competition benefits the consumer.
Chapter 3 The Free Enterprise System 17
3.1 ASSESSMENTASSESSMENT
Reviewing Key Terms and Concepts
1. Provide an example of how freedom of ownership may be limited by government.
2. Provide an example of a business that uses price competition and one that uses nonprice competition.
3. What principle of free enterprise provides the incentive for people to risk their money on business ventures?
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Reviewing Key Terms and Concepts
4. What is risk, and why is it relevant to a free enterprise system?
5. How do profitable businesses benefit the economy?
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3.1 ASSESSMENTASSESSMENT
Thinking Critically
With computer technology becoming an integral part of business operations and the growth of Internet related industries, applications for patents for new business processes are increasing. Patents for a one-click system for online orders are pending. What are some consequences of such patents being granted?
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Marketing EssentialsMarketing Essentials
End of Section 3.1