ECONOMICS FREE ENTERPRISE SYSTEM & SUPPLY AND DEMAND

Review  Three fundamental economic questions?  Market Economy  Command Economy  Mixed Economy

Free Enterprise System  Free Enterprise System: “A system that encourages individuals to start and operate their own businesses without government involvement”  Which Factor of Production is related to this?

Characteristics of Free Enterprise  Freedom of Ownership  Risk  Profit  Competition

Freedom of Ownership  Freedom of Ownership: “Individuals are free to own personal property”  personal property: car, home, computer  Can do what you want with property  lease, sell or give away  Encourages individuals to own their own businesses

Risk  Risk: “Potential for loss or failure”  What risks do businesses take?  Possibility to be sued  Loss of all personal savings used to start-up the business  Natural disasters

Profit  Profit: “Money earned from conducting business after all costs and expenses have been paid”  Profit is:  motivation for taking risk  reward for taking risk  reward for meeting customer wants and needs  used to pay owners, stockholders  Profit is driving force of free enterprise!

Competition  Competition: “The struggle between companies for customers”  Competition:  essential part of free enterprise  forces businesses to produce better quality products  keeps prices “in-check”  results in wider selection of products and services

Types of Competition  Price Competition: “focuses on the sale price of a product”  Assumption behind this: “if all else is equal, the customer will buy the product with the lowest cost” … WHAT DO YOU THINK?  Non-Price Competition: “focuses on factors that are NOT related to price”  Assumption behind this: “if all else is equal, the customer will buy the product with better quality & closer sales location” … WHAT DO YOU THINK?

Monopoly  Monopoly: “no competition and one company controls the entire market”

Review  Free Enterprise System  Freedom of Ownership  Risk  Profit  Competition  Price Competition  Non-Price Competition  Monopoly

Supply and Demand  Supply: “amount of goods producers are willing to make & sell”  example: 48 jackets, 20 sweatshirts, 15 tote bags  Demand: “consumers willingness & ability to buy products”  example: students wanted to buy the items above  Supply and demand determine prices and quantities of goods and services produced

Equilibrium  Equilibrium: “when the amount of a product (supply) is equal to the amount consumers want (demand)” Supply = Demand

Theory of Supply and Demand  When supply is HIGH and demand is LOW, the price will be LOW  When demand is HIGH and supply is LOW, the price will be HIGH

Surplus v. Shortage  Surplus: Supply is high, Demand is low, Price is low  Shortage: Supply is low, Demand is high, Price is high