Market Oriented Economic Systems

Basic PrinciplesIndividuals should have freedom of choice

Elect people to represent us in government Where we work How we spend our money PURCHASE good and services Invest in banks or businesses

Free EnterpriseBasis - Freedom to:

Own personal property Compete Take risks Make a profit

Encourages individuals to start and operate their own business in a competitive system without government involvement The marketplace determines prices through

supply/demand Us is modified – the government does intervene to

protect citizens

Ownership• Personal Property

• Cars, computers, homes

• Natural Resources

• Oil, land

• Businesses

• Entrepreneurs, stockholders

• Intellectual Property

• Patent, trademark, copyright, trade secret

Intellectual Property• Also know as “I.P.”

• I.P. is/ are ideas that have value in a free enterprise system

• Patent – invention – you own the rights to that item or idea. Once patent is granted, exclusive rights for 20 years ®

• Trademark – word, name, symbol, sound, color that identifies a good or service. Can be renewed forever. TM

• Copyright – writings, music, artwork – author gets exclusive right to reproduce or sell the work. Life + 70 years ©

• Trade Secret – information that a company keeps and protects for it’s use only.

• When a company wants to use another’s name, symbol, creative work, or product it must get permission and pay for the use.

Competition• The struggle between businesses to gain customers

• Forces business to produce better-quality goods and services at reasonable prices

• Results in a wider selection of products

• The absence of competition is called Monopoly

• Exclusive control over a product or the means of producing it

• One firm controls the market for a product

• A company can charge whatever it wants

• Controls the quality of the product and who can get it

Price vs. Non-Price Competition

• Price Competition focuses on offering products for a lower __________

• Non-Price Competition focuses on offering products based on factors such as quality, service, financing, location and reputation.

• May charge more for their products than competitors do

• Company’s reliability, tradition, free shipping, same-day delivery

RiskAlong with the benefits of owning a business

also comes risk (or business risk)The potential for loss or failurePotential for earning = risk Risk of being sued or having name tarnished

by bad publicityAs competition increases the risk for

individual firms goes up tooDevelopment of new products – 85% of new

products fail in the first year

Profit• The goal of operating a business is to earn a profit

Profit is the money earned from conducting business after all costs and expenses have been paid The range of profit is 1% to 5% of sales; the remaining %

foes to pay costs, expenses, and business taxesProfit is the motivation for taking risk and starting

a businessProfits may be used to pay stockholders or they

can be reinvested into the businessHigh Sales and Low Costs = Higher Profit

Supply and DemandDetermines the prices and quantities of goods

and services in a market-oriented economySUPPLY – the amount of goods producers are

willing to make and sell As prices rise the quantity supplied rises As prices fall the quantity supplied falls Suppliers want to supply larger amount of goods at

higher prices so their business can be more profitableDEMAND – consumer willingness and ability

to buy products As the price increases the quantity demanded falls As the price falls the quantity demanded increases

Supply and DemandSurplus – supply > demand

If a price is too high, or seems unreasonable, customers may decide not to buy it (produce)

Shortage – demand > supply When this occurs, a business can raise their prices

and still sell their merchandise (gas)Equilibrium – supply = demand

Everyone wins! Customers can purchase goods/services at a fair price and retailers experience a steady flow of business