Presentation Transcript

1. The Free Enterprise System

   Chapter 3
2. Capitalism Basic Principles Free enterprise system- encourages individuals to start and operate their own businesses without government involvement. Today, government does intervene on a limited basis.
3. Basic Principles Freedom of ownership: Individuals are free to own personal property such as: Cars, computers, and homes. You can do with your property as you will as long as it is legal. Intellectual property rights fall under this.
4. Example) You come up with a product or idea so in order to protect it, you have to apply for a patent. Anyone that would want to use your idea or product, would have to pay you through a licensing agreement. Professional athletes use licensing agreements to protect their names and images. Companies have to pay tem in order to use their name and image.
5. Competition Competition- The struggle between companies for customers. Essential part of free enterprise system It forces business to produce better quality goods and services at a reasonable price. Competition is comprised of two things: Price and nonprice competition
6. Price Competition Price Competition- Focuses on the sale price of a product. The assumption is that, all other things being equal, consumers will by the products that are the lowest price. Examples) Ross and TL Maxx
7. Nonprice Competition Nonprice Competition- Business choose to compete on the basis of factors that are not related to price. Factors are: Quality of the product Service and financing Business location Reputation Nordstrom is an example.
8. Monopolies Monopoly – Exclusive control over a product or the means of producing it. Not permitted in the free enterprise system because it does not allow for competition. Case) Microsoft was declared a monopoly by a federal judge. So, though not permitted, the US government has allowed a few to exist. UTILITY COMPANIES AT&T WAS UNTIL 1982.
9. Risk Risk- The potential for loss or failure in relation to the potential for improved earnings. Potential for earnings increases, so does risk. 1 out of 3 businesses fail a year.
10. Profit Profit- The money earned from conduction business after all costs and expenses have been paid. Profit for businesses is about 1-5% while the rest goes to cost, expenses and taxes.
11. Economics Cost of Unprofitable Firms Effects: People get laid off Lose money Government loses money in taxes from the business Rise in unemployment Everyone loses
12. Economic Benefits of Successful Firms Success: Hire more people Employees paid more Higher morale Investors make money Government makes money on taxation Money goes back into the economy