Download Chapter 5 Notes - Union High School

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BE 280 Marketing Educational
Chapter 5
Free Enterprise System
Basic Principles
Our nation’s founders believed that individuals should have freedom of choice.
For example, in the United State we have the:
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The freedom to elect the people who represent us in our government
The freedom to make decisions about where we work
The freedom to make decisions about how we spend our money
The freedom to organize and negotiate with business, as part of a labor union
Free Enterprise SystemEncourages individuals to start and operate their own businesses in a competitive system without government
involvement
The free enterprise system in the U.S. is modified because the government does intervene in business on a
limited basis.
The government does this to protect citizens, while supporting the principles of free enterprise.
Freedom of Ownership
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Individuals in our free enterprise system are free to own personal property, such as cars, computers
and homes, as well as natural resources such as oil and land.
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You can buy anything you want as long as it is not prohibited by law.
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You can also do what you want with your property in the free enterprise system. You can give it
away, lease it, sell it, or use it for yourself.
Business Ownership
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The free enterprise system encourages individuals to own business.
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Individuals who start their own businesses are called entrepreneurs.
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There are some restrictions on how and when businesses may operate.
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Most kinds of businesses are zoned out of areas intended for private housing.
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Manufacturers may be forced to comply with certain environmental and safety measures
Intellectual Property Rights
Intellectual property rights are protected in a free enterprise system.
Patents, trademarks, copyrights and trade secrets are intellectual property rights.
If you get a patent on an invention, you alone own the rights to that item or idea.
How would you ensure that protection? You would apply for a patent in the U.S, Patent and Trademark
Office.
If granted, you would have exclusive right to make, use or sell that invention for up to 20 years.
During that time, anyone who want to manufacture your product would have to pay you for its use through a
licensing agreement.
Trademark- a word, name, symbol, sound, or color that identifies a good or service and cannot be used
by anyone but the owner.
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Unlike a patent, a trademark can be renewed forever, if it is being used by a business.
Copyright- anything that is authored by an individual, such as writings (books, magazine articles, etc.),
music, and artwork.
Gives the author :
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Exclusive right to reproduce or sell the work.
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Valid for the life of the author plus 70 years.
Trade Secret- Information that a company keeps and protects for its use only, but is not patented.
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Ex. – Coca-Cola’s formula for Coke is a trade secret that is not protected by a patent, but the company
guards the information.
When a company wants to use another’s name, symbol, creative work or product, it must get permission to
do so and pay a fee for the use.
Licensing agreement- Protects the originator’s name and products.
Example: A T-shirt manufacturer might be granted a licensing agreement with the National Football
League (NFL) so that it can produce T-shirts with NFL logos on them.
Competition
Businesses that operate in the free enterprise system try to attract new customers and keep old ones.
Other businesses try to take those same customers away.
Competition- The struggle for customers
Why is competition an essential part of the free enterprise system?
It is one of the means by which the free enterprise system functions to benefit consumers.
Competition forces businesses to produce better-quality goods and services at reasonable prices.
Competition results in a wider selection of products from which to choose.
Price and Nonprice Competition
Price competition- focuses on the sale price of a product.
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Assumption is that, all things being equal, consumers will buy the products that are lowest in
price.
Examples: Marketing strategies used by Wal-Mart and Southwest Airlines.
Wal-Mart – “Always low prices, Always.”
Nonprice competition- businesses choose to compete on the basis of factors that are not related to price.
These factors include:
 Quality of products, service, financing, business location and reputation
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The qualifications or expertise of their personnel.
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May Charge more for their products then their competitors do.
Examples: stress a company’s reliability, tradition, superior know-how, and special services.
Dot-com companies: offers of free shipping and same-day delivery.
Monopolies
When there is no competition and one firm controls the market for a given product, a monopoly exists.
Monopoly- exclusive control over a product or the means to produce it.
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Monopolies are NOT permitted in free enterprise system because they prevent competition.
It can also control the quality of a product and who gets it.
Without competition, there is nothing to stop a company from acting without regard to customer
wants and needs.
Example:
The U.S. government allowed a few monopolies to exist, mainly in industries where it would be wasteful to
have more than one firm.
These regulated monopolies however, are on the decline.
Risk
Along with the benefits that come from competition and private ownership of property, businesses also face
risk.
Business risk- the potential for loss or failure.
 As the potential for earnings gets greater, so does the risk.
 Ex. – putting money in the bank without guaranteed interest rates is less risky than investing in
the stock market where the value of shares of stocks fluctuates.
 A Company is a risk. 1 out of every 3 businesses in the US fails after 1 year of operation.
 Businesses also run the risk of being sued or having their name tarnished by bad publicity.
Profit
Profit- the money earned from conducting business after all costs and expenses have been paid.
Profit is often misunderstood. Some people think the money a business earns from sales is profit. That is
NOT TRUE!
 Range of profit for most businesses is 1% to 5% of sales
 The remaining 95to 99% goes to pay costs, expenses and business taxes.
 Profit is the motivation for taking the risk of starting a business.
 It is the potential reward for taking that risk.
 It is also the reward for satisfying the needs and wants of customers and consumers.
 Profit is the driving force in our free enterprise system.
 Profit remains high when sales are high and costs are kept low.
Economic Cost of Unsuccessful Firms
 An unprofitable business faces many problems
 One of the things businesses do when their profits decline is lay off employees.
 Government also suffers when business profits decline.
 Businesses pay less money in taxes
 When workers lay off employees, unemployment rises.
 This causes an increase in the cost of social services.
Economic Cost of Successful Firms
 Profitable businesses hire more people.
 Employees may have higher incomes, better benefits and higher morale.
 As employment and profits climb, the government makes more money from taxes of individuals
and businesses.
 Profitable companies attract competition, which is beneficial to the consumer.
 When people earn higher incomes, they have more money to spend.
Supply and Demand
In a market-oriented economy, supply and demand determines that prices of goods and services produced.
Look at page 107 figure 5.1
Supply- the amount of goods producers are willing to make and sell.
The law of supply is the economic rule that price and quantity supplied move in the same direction.
This mean that as prices rise for a good, the number supplied generally rises and as the price falls, the quantity
supplied by sellers also falls.
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Suppliers want to supply a larger quantity of goods at higher prices so their businesses can be more
profitable.
Demand- refers to consumer willingness and ability to buy products.
The law of demand is the economic rule that price and demand move in opposite directions.
This means, as prices of goods increase, the quantity of the good demanded falls.
As the prices fall, demand for the goods increases.
Surplus- Occurs when supply exceeds demand. If the price of a product is too high or seems
unreasonable to customers, they may decide not to buy it.
Shortage- When demand exceeds supply, shortages of products occur. When shortages occur, businesses
can raise prices and still sell their merchandise.
Equilibrium- When the amount of a product being supplied is equal to the amount being demanded.
When supply and demand are balanced, everyone wins.