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The Free EnterpriseChapter 5.1
2.3 Analyze the Free Enterprise
Our Basic Economic Freedoms
• Freedom of Ownership– Personal Items, businesses, private property,
Intellectual property
• Freedom to Compete
• Freedom to Take a Risk
• Freedom to Make a Profit– Profit is the driving motive in our economy
Intellectual Property Rights
• Patent: Invention for up to 20 years
• Trademark: word, name, symbol or color identifying a business or product – life of business
• Copyright: writings, music, artwork for life of author plus 70 years
Competition
• Struggle between companies for customers
• Benefits:
– Lower Prices
– Better Quality
Two Types of Competition
PRICE
Focuses on the sale price of a product
NONPRICE
Compete on the basis of factors not related to price
- services
- location
- reputation, etc.
Monopoly
• There is no competition and one firm controls the market for a given product.
• Gives exclusive control over a product or means of production– Microsoft = Technology dominance
• NOT LEGAL IN A DEMOCRACY– Exception = utilities
Risk = Profit
• Risk = The potential for loss or failure.– Money, investments, reputation, – 85% of new product fail in first year!
• You must take risk in order to earn profit• Profit is the money earned after all costs and
expenses have been paid. – 1-5% of sales
• Profit provides the incentive for a person to take risk.
How are prices determined in our market place?
The interaction of Supply and Demand!
2.6 Evaluate the relationship of cost/profit to supply/demand
Law of Demand
DEMAND: consumers’ willingness and ability to buy products
The lower prices create higher demand; higher prices have a lower demand
Exception to the Law: Diminishing Marginal Utility: Consumers will buy just so much of a given product
Elasticity of Demand (2 types)
• Elastic Demand – Slight change in $ price $ = creates a LARGE change in demand– Products are items of WANT, not in urgent
need, substitutes are available
• Inelastic Demand – Changes in $price$ = creates very little change in demand– Products are necessities, in urgent need, have
no available substitutes
Law of Supply
SUPPLY: The amount of goods producers are willing to make and sell
At higher prices, producers will offer a large quantity of products for sale; at lower prices, producers offer fewer products for sale
Supply and Demand TheoryTerms to know!
• Equilibrium: The point at which Supply and Demand are equal– The goal!!
• Surplus: Supply exceeds Demand; Prices will typically lower to reach demand (equilibrium)
• Shortage: Demand exceeds Supply; Prices will generally rise until producers can meet the demand (equilibrium)
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