Free Enterprise

What is Free Enterprise?

• Free Enterprise:

Encouraging private ownership and individual initiative (independently outside of influence or control)

Tradition of Free Enterprise• America is considered the “land of

opportunity”

• History of social and political commitment to entrepreneurship and competition in the marketplace.

Examples: Rockefeller, Carnegie, Henry Ford

Basic Principles of Free Enterprise

1. Profit Motive

–Encourages Individuals to take the risk of investing in business

– Individuals make decisions that will maximize profits

–Requires financial discipline = individuals are responsible for success or failure

–Rewards innovation

–Allows creative companies to grow

– Improves productivity = higher profits to more efficient company

Basic Principles of Free Enterprise

2. Open Opportunity

–EVERYONE can compete in the marketplace

3. Economic Rights

- Legal equality = everyone has the same legal rights- Private property rights = you control your possessions as you wish.- Free contract- Voluntary exchange = you decide what and when to buy and sell

Role of Government

4. Copyrights – Grants an author exclusive rights to publish and sell their work.

Piracy: Downloading of music, burning CD’s (Examples: Napster, Limewire etc.)

5. Patent – Gives inventor exclusive right to produce and sell a product for 20 years.

Review

• What Economic Philosopher would agree with the free enterprise system? Why?

• How is a patent different than a copyright?

• What is the Number 1 motive people have to enter into the free market system?

• What risk do Entrepreneurs take to enter the free market?

• Productivity: The value of output produced

• Production: The creation of value or the producing of

articles that have exchange value.

Factors that Effect Economic Decisions

Consumption• The amount of goods and services

used

• Goods- Products

• Services- things provided• BUYERS = CONSUMERS

• SELLERS = PRODUCERS

BUYERS & SELLERS COME TOGETHER TO EXCHANGE THINGS OF VALUE

• Specialization:

• Focusing your efforts on a limited number of activities

• Doctors, Teachers, Lawyers

• Efficiency:

• Performing in the best possible manner with the least waste of time and resources

• Division of Labor:

• Each person is given a specific task to repeat over and over again.

• Henry Ford…assembly line

Competition in the Marketplace

MONOPOLY

• ONLY ONE PRODUCER• NO COMPETITION• CHARGE HIGHER PRICES• PRODUCE LESS• PROVIDE LESS QUALITY (WHY?)

• What is an example of a current monopoly?

OLIGOPOLY

• Only a few producers• Operate between competitive

markets and monopolies

• Examples: Utilities (what are they?)

• CONGLOMERATES:

• Large Companies that combine to form larger companies

• Example: General Electric (GE) – They own NBC, financial services and health care services

• Multi-National Conglomerators: CONGLOMERATE with companies operating in more than one country.

• Example: BP (British Petroleum)

MERGER• The process when one firm buys/joins with

another.• Horizontal Merger-

• Joins two or more firms competing in the same market with the same good or service.

• Vertical Merger -

• Joins two or more firms involved in different stages of producing the same good or service. A vertical merger can allow a firm to operate more efficiently.

• An example of a vertical merger is a car manufacturer purchasing a tire company.

Market Structure

• Competition

• The rivalry between sellers to attract customers while lowering costs

• Cooperation

• the combination of persons for purposes of production, purchase, or distribution for their joint benefit

Review

• Why do Monopolies tend to produce less output, charge higher prices, and provide less quality than competitive markets?

• What is the difference between competition & cooperation?