Marketing Ch. 3

Our Free Enterprise System

Basic Principles

• Free Enterprise System– Individuals should have freedom of choice– Encourages individuals to start and operate their

own business without government involvement.

Freedom of Ownership

• You have the right to own your own business however there are some restrictions on how and where those businesses may operate.– Zoning laws

Competition

• Struggle between companies for customers• Healthy and vital to our free enterprise system– Help motivate people to improve themselves– Forces businesses to produce better-quality goods

and services at a reasonable price.• Develop new products and improve old ones• Wider selection of a product to choose from

Two Basic ways Businesses Compete

1. Price Competition2. NonPrice Competition

Price Competition

• Focuses on the sale of a product• Assuming all things are equal – Customers will

purchases the product that has the lowest price.

Nonprice Competition

• Businesses choice to compete on the basis of factors that are not related to price– Quality of product– Service and financing– Business location– Reputation– Qualifications and expertise of their personnel

Monopolies

• Exclusive control over a product or the means to produce one.

• When there is no competition and one firm controls the market

• Prohibited

Risk

• Risk is the potential for loss or failure• Perceived in relation to the potential from

improved earnings

Profit

• Money earned from conducting business after all costs and expense

• Provides the incentive for people to risk their own money

• Profit for most businesses is 1-5% of sales

Economic Cost of Unprofitable Firms

• First thing they do is lay off employees• Investors lose money if the value of their stock

falls below what they paid for it.• Fewer resources• Cuts back on research and development of

new products• Government suffers because businesses pay

less taxes• Unemployment ups the cost for social services

Economic Benefits of Successful Firm

• Hire more people and pay them well• Investors earn money, which in turn they

spend or reinvest• Vendors and Suppliers make more money• Government receives more in individual and

business taxes• Companies contribute more to charities• Attract more competition

The Role of Government

• Government plays four roles in our free enterprise system:1. Provides general services2. Supports businesses3. Regulates businesses4. Competes with private businesses

Provides general services

• Our government provides:– Military– Police and Fire protection– Free public education• Retraining for people who have lost their job–Joint Training Partnership Act

– Builds and supports the building of roads and bridges

Provides general services

• Our government provides:– Public Library– Social welfare system– Medicare• Elderly

– Medicaid• Poor

Supporter of Business• Supports business in times of crisis– Government guaranteed loans to auto industry

• Disaster assistance– Floods and earthquakes

• Small Business Administration (SBA)– Provides counseling and educational materials to

prospective business owners to help insure success

– Loan guarantees– Establish trade alliances and agreements with

other countries

Regulator

• Make laws designed to protect the safety, health, and welfare of individuals

• Consumer and Worker Protection– Laws are carried out by regulatory agencies• Food and Drug Administration (FDA)• Equal Employment Opportunity Commission

(EEOC)• Occupational Safety and Health Administration

(OSHA)• Consumer Product Safety Commission (CPSC)

Regulator

• Consumer and Worker Protection– Environmental Protection Agency (EPA)– Local Zoning Ordinances to help protect the value

of residential real estate– Securities and Exchange Commission (SEC)• Licensing of brokerage firms and financial advisors

Regulator

• Consumer and Worker Protection– State and local level• Require licensing of people• Health department • Minimum wage–$7.70–Minimum wage flyer

Regulator

• Business Protection– To protect our private property rights, governments

provides laws and regulation regarding:

• Patents–Exclude other from making, using, and/or

selling the invention for 20 years• Copyrights ©

– Giving creators of original work the exclusive rights to it for Life of the author plus 50 years

• Trademarks– Distinctive sign or indicator used by business organization– Typically a word, slogan, symbol, design, or image

Regulator

• Business Protection– To protect our private property rights, governments

provides laws and regulation regarding:• Trademarks– Distinctive sign or indicator used by business

organization– Typically a word, slogan, symbol, design, or image– Unregistered Trademarks ™– Registered Trademarks ®– They last indefinitely

Regulator

• Business Protection– To protect our private property rights, governments

provides laws and regulation regarding:

• Licensing agreement– Protects originators name and product

Regulator

• Business Protection– Sherman Antitrust Act• Prevents monopolies• Outlaws all contracts and agreements that restrain free

trade or limits competition

– Clayton Antitrust Act• Created the Federal Trade Commission (FTC)• Included investigations of deceptive and misleading

business practices like false advertising

Regulator

• Business Protection– Federal Reserve System• Government monitors our economy and

controls our monetary supply• When the economy is improving or moving to

slowly it reacts–Prices going up to fast – Increase interest

rates–Prices moving to slow – Decrease interest

rates

Competitors

• US government runs three business operations:– Tennessee Valley Authority– U.S. Postal Service– Amtrak– Also run national parks and campgrounds

Role of the Consumer

• Consumers do two major things in the marketplace1. Pick the winner that will be in the marketplace

tomorrow2. Determine how much demand there is for any

given product and helps determine prices

Deciding Which Businesses Survive

• Consumers decide which products will be produced and which companies will stay in business– This is done by shopping

Determining Prices

• When supply and demand interact, they create:– Surplus – supply exceeds demand– Shortages – Demand exceeds supply– Equilibrium – Supply and demand equal