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Chapter 28
Our free enterprise system
Free Enterprise System
Also called a market economy or capitalism
Producers and Consumers are free to
engage in business transactions with minimal
government interference.
Producers- are the manufacturers or makers
of goods and services for sale
Consumers are the buyers and users of
goods and services.
Everyone is a consumer because we all use
goods and services.
Wants are unlimited however the resources
for producing the products to satisfy these
wants are limited. This basic economic
problem is called scarcity.
A country’s economic system determines
what products its businesses will produce
with its limited resources
To make a profit- producers must provide
goods and services that consumers will buy
As an individual consumer, you have limited
resources. You must decide what to buy with
your limited money to achieve the greatest
satisfaction or utility.
Your spending decisions and those of other
consumers determine which products will
succeed and which will fail and leave the
Supply and Demand
Supply is the quantity of goods and
services that producers are willing and
able to provide.
Demand is the willingness and ability of
consumers to purchase goods and
services at certain prices.
Supply and Demand
Increased demand creates a situation in
which the supply of the product is not
sufficient to satisfy all consumers who want to
buy it. As a result, producers can raise their
The high prices bring large profits to the
Large profits prompt current producers to
make more of the product and attract other
producers to start providing the product,
increasing the supply.
Supply and Demand
Supply then exceeds demand and consumers can
pick and choose. In order to entice consumers to buy
their product instead of their competitors’, producers
reduce their prices
Reducing prices in turn, lowers profits, and producers
begin to produce less
Eventually the product reaches its EQUILIBRIUM
PRICE. This is the price at which the quantity
supplied equals the quantity demanded of the
product. At this price, there is just enough of the
product available for all consumers who want to buy
Consumers have the ultimate power in
a free enterprise system. Consumers
determine what is produced and at what
price. Collectively, consumer buying
decisions direct the production of goods
and services.
Producers also have power in a free
enterprise system, because they can employ
various techniques to influence consumer
buying decisions. They use advertising and
other marketing strategies to try to increase
demand for their products.
You must understand the role of advertising
and other marketing strategies on our
economic system and become a careful
Free Enterprise System
Three basic conditions exist for a free
enterprise system to function smoothly
Purchasing Power
Informed Consumers
When these three are in place, the best
possible product are produced, at the
highest quality and at the best price.
Illegal Business Practices
Illegal business practices can reduce
competition and result in higher prices.
Price Fixing is an illegal agreement among
competitors to sell a good or service for a set
There is no real competition because prices
have been predetermined or fixed.
It prevents the forces of supply and demand
from determining prices freely in the
marketplace, it impedes free enterprise and
the government
Purchasing Power
For free enterprise to operate, citizens must
have the ability to buy.
Purchasing power is the value of money,
measured in the amount of goods and
services that it can buy.
In periods of inflation, when prices are generally
rising in the economy, purchasing power
Purchasing power also declines during periods
of recession. People who lose their jobs or
have their wages reduced cannot buy as
many goods.
Transfer Payments
The government also shifts purchasing power
among citizens by making transfer payments.
Transfer payments are government grants to
some citizens paid with money collected from
other citizens, generally through taxes.
For the receivers, transfer payments are
unearned income.
This provides purchasing power for needy
people. Welfare, Social Security and Veteran
Benefits are all transfer payments.
Deceptive Practices
Consumers must educate themselves to
recognize a potential fraud before they
become victims.
Bait and Switch: illegal sales technique in
which a seller advertises a product with the
intention of persuading consumers to buy a
more expensive product.
The bait is the bargain product that gets
customers into the store.
Switch- is when the salesperson switches
them to a more expensive product.
Deceptive Practices: Fake Sale
Educated consumers are the best way to
protect consumers against deceptive
Fake Sale: the most common of all consumer
fraud. A merchant advertises a big sale but
keeps the items at regular price or make the
price tags look like a price reduction when
there actually is none.
Deceptive Practices:Lowballing
Low balling: advertising a service at an
unusually low price to lure customers, and
then attempting to persuade them that they
need additional services.
For example a repair shop may offer special
on brake realigning. But when the mechanics
inspect the brakes, they find several other
“necessary” repairs.
To protect yourself: state that you want no
repairs other than those agreed upon unless
the repair shop informs you of the additional
cost ahead of time and you choose to
authorize the extra repairs.
Pyramid Schemes
Mostly illegal multilevel marketing plans that
promise distributors commissions from their
own sales and those of other distributors they
recruit. A cash investment of some kind is
usually required to become a distributors. But
despite their claims to have legitimate
products or services to sell, these fraudsters
simply use money coming in from new
recruits to pay off early stage investors.
But eventually the
pyramid will
collapse. At some
point the schemes
get too big, the
promoter cannot
raise enough money
from new investors
to pay earlier
investors, and many
people lose their
Multilevel Marketing
Some are well run businesses
(Tupperware parties, Pampered Chef,
Thirty-One, Partylite, etc.)
If you get involved, as long as your main
goal is selling a product, then you are
probably ok.
Deceptive Schemes: Pigeon Drop
Pigeon drop refers to any method used
by experienced con artists to convince
vulnerable people to invest in phony
investments, swampland real estate, or
other swindles. The pigeon is the
unsuspecting consumer. Con artists
often target trusting people who know
little of such scams but do have a
source of money
Other types of Fraud
Door to door solicitors
Health claims (miracle pills)
Infomercials-no guarantee claims are
Internet Fraud
Telemarketing Fraud
Responsible Consumer
Be suspicious
Be aware of prices
Become educated before buying products
Don’t give personal information out over the
phone, internet
Shop around
Understand sale terminology
Avoid impulse buying
Plan your purchases
Compute unit prices
Responsible Consumer
Read labels
Check containers carefully
Read contracts
Keep receipts and warranties
Compute total cost
Ask for references
Be loyal
Check up on businesses
Wait a day for a major purchase