Download Free Enterprise System - Lindbergh School District

What is an Economy?
Unit 2
Scarcity-exists when people’s wants
exceed their needs
Requires countries to make choices
Some developing countries have a lot of
natural resources but few skilled workers,
little land, and no infrastructure
Some economies have labor but not
enough natural resources to produce
products.
What is an Economy? The way a nation
makes economic choices
 Way a nation makes
economic choices
concerning its use of
resources to
produce goods and
services
 Resources
land
labor
capital
entrepreneurship
Scarcity leads to the
Three Basic Economic Questions
 What goods and services should be
produced?
 How should the goods and services be
produced?
 For whom should the goods and
services be produced?
 The way a country answers these
questions determines the type of
economic system it operates under
Market vs. Command Economies
 Market-no government 
involvement
What? Consumers
decide what should be
produced
How? Left up to
businesses in the
market economy
For whom? People who
have more money are
able to buy more goods.
Motivates people to
work and invest
Command-government
answers all questions
What? Dictator or group
of gov’t officials decides
what products are
needed
How? The gov’t runs all
businesses. It employs
all workers.
For whom? Gov’t
decides who will get
what is produced. It
provides for everyone’s
basic needs.
Mixed Economies
Capitalist Model
Democratic form of government, free
enterprise, concerned about people but not as
many social programs as socialist country.
Japan, US
Socialist Model
Democratic form of government (usually),
government tries to reduce the difference b/t
rich and poor through social programs. Key
industries run by gov’t, higher taxes than
capitalist countries. Germany, Great Britain,
Sweden, Australia, France
Command Economies
Communist model
Totalitarian form of government, ensures all
people share common economic & political
goals.
All who are able to work are assigned jobs. If
don’t work--still paid. No unemployment.
Gov’t decides what schooling you receive,
where you live. Housing, food and medical
subsidies.
Most communist economies have collapsed b/c
no incentive to work. Cuba, North Korea
Factors of production
Term economists use for resources
Land
Labor
Capital
Entrepreneurship
Factors of Production-all the things used in
producing goods & services
 Labor-all people who
work in an economy
 Land-everything on
the earth in its
Limits on education level
natural state
of workers
depletion of
natural resources
 Capital-money (needed
to start or operate the
 Entrepreneurshipbusiness) & goods used
skills of people
in the production process willing to risk their
Infrastructure-physical
development of a country
time and money to
run a business
lack of gov’t
support
Free Enterprise System-system built on the
principle of freedom of choice
 In the US we have
freedom of choice
 Our economic system is
an outgrowth of that
philosophy
 Encourages starting &
operating businesses
without government
interference
 Modified b/c there is
some intervention
Free Enterprise System
 Four Aspects of a Free Enterprise
System
1. Freedom of ownership
 Free to own houses, natural resources, &
businesses
 some limitations on zoning restrictions,
environmental restriction
Free Enterprise System
2. Competition-struggle between
companies for customers
 Vital to free enterprise
 Forces businesses too provide better-quality
goods& services at reasonable prices
 Develop new products and improve older ones
 Wider selection of products to choose from
 Two ways to compete:
 price –focus on sale price of a product
 Nonprice-business compete on factors not
related to price such as quality or customer
service
Free Enterprise
2. Competition con’t
Monopoly- exclusive control over a product or
the means to produce it. Can you name some
examples?
Usually prohibited, but in US a few are
permitted
3. Risk-potential for loss or failure
Usually seen in relationship to potential
earnings
Greater risk, greater profit
Free Enterprise System
4. Profit-money earned from conducting business
after all costs and expenses are paid
Usually 1-5% of sales, 95-99% of sales go to expenses
Costs of unprofitable firms
 Laid off workers
 investors lose money on stocks
 cut backs in R&D
 Less taxes
 Effects profitability of suppliers
Free Enterprise System
4. Profit con’t
Benefits of successful firms
hire more people & pay them well
Investors earn money
Vendors & suppliers make money
Increased taxes
More likely to contribute to charities
Attract more competition
Role of Government
 Plays 4 roles in free
enterprise system
 provides general services
 supports businesses to
promote the growth &
development of our nation
 regulates businesses(fair &
safety)
 Licensing agreementprotects originator’s name
and product
 competes with private
business
Provider of Services
 Provides military,
police, and fire
protection
 Free public
education
 Retraining for
displaced workers
(JTPA)
 Roads & bridges
 Medicare(elderly) &
Medicaid (poor)
Supporter of Business
 Bailouts in times of
crisis (Chrysler, floods,
earthquakes)
 Small Business
Association (SBA)
counseling, educational
materials
guarantees loans
 Trade alliances &
agreements w/ foreign
countries
Regulator
 Make laws to protect the
safety, health & welfare
of the public
 Consumer & worker
protection (FDA,OSHA)
business licensing
food protection
minimum wage
sales of securities(?)
Regulator
 To protect businesses
regulations & laws
regarding copyrights,
patents, & trademarks
licensing agreements
industrial espionage
trade restrictions
Sherman & Clayton
Antitrust Acts (FTC)
Monitors& controls
money supply
Competitor
 Government runs three
business operations
Tennessee Valley Authority
US Postal Service
Amtrak
 In addition it runs parks
and campgrounds (Arch,
Yosemite)
Role of Consumer
Deciding which businesses survive
every time consumers purchase they are
voting with their dollars
makes consumers very powerful
Determining Prices
Laws of supply (amount of goods
producers are willing to make and sell)
and demand (consumers willingness and
ability to buy products)
Determining prices
Interaction between supply and demand
determine what consumers will pay for
products
Equilibrium-when the amount of products
supplied is equal to the amount demanded
Surplus-supply exceeds demand
Shortage-demand exceeds supply
Supply and Demand
Understanding the Economy
Economic Measurements are key
indicators that determine the strength of
an economy
Productivity - output per worker hour. (Usually
measured over a period of time)
Output per year (in tons)/ workers x hours x weeks =
output per worker hour.
GDP - Gross Domestic Product - is a measure of the
goods and services produced using labor and
property located in this country.
Economic Measurements Cont.
GNP - Gross National Product Everything produces by U.S. citizens here
and abroad.
Today GDP is more useful, most other
nations use GDP as well.
Standard of Living - Measure of the
amount of goods and services that a
nation’s people have. A quality of life
measurement.
Economic Measurements Cont.
Inflation Rate - rising prices. (1 - 5 % is
low)
Gov’t controls inflation by raising interest rates.
CPI - Consumer Price Index - measures
the change in price over a time of some
400 specific goods and services. Also
called the cost of living index.
Economic Measurements Cont.
Unemployment Rate - the higher the
unemployment rate the greater the
chances of economic slowdown.
Business Cycles - recurring changes
in the economy
 Prosperity - economic growth (low
unemployment/high spending.
 Recession - economic slowdown
(unemployment up/consumer
spending down.
 Depression - Prolonged and deep
recession.
 Recovery - renewed growth/
increased spending and reduced
unemployment.
Essential question
How does marketing affect consumer
goods and services in different economic
systems?
Think about how products can be marketed in
each system.
International Trade – the exchange of
goods and services among nations.
Imports – are goods and services
purchased from other countries.
Exports – are goods and services sold to
other countries.
These exchanges occur among
businesses, but they are controlled by the
governments of the countries involved.
What is the trade deficit?
Interdependence of Nations
 Most countries do not produce or manufacture
all the goods and services they need.
 Each country possesses unique resources that
other countries need.
 The principal of economic independence is
fundamental to marketing in the global
environment.
 What does the U.S. need from other countries?
Absolute vs. Comparative Advantage
Certain nations have economic
advantages over its trading partners.
Absolute advantage occurs when a
country has economic resources that allow
it to produce more units than any other
country.
China produces 80% of all the silk in the
world.
Comparative Advantage
The value that a nation gains by selling
what it produces most efficiently.
When countries specialize in products or
services well suited to their capabilities, they
may gain a comparative advantage in
international trade.
U.S. has a comparative advantage in producing
high tech goods because of our educated work
force.
Benefits of International Trade
 Consumers benefit because competition causes
the prices to go down.
 Variety of goods increases.
 Producers expand their operations in other
countries.
 Workers benefit because international trade can
lead to higher employment rates. Toyota has
generated 500,000 jobs in the U.S.
 Increased foreign investment improves the
standard of living for that country’s people.
 We have more options when purchasing items.