1. X100 Introduction to Business
Free Enterprise & Economic Systems
X100 Introduction to Business
Free Enterprise and Economic Systems
Professor Kenneth EA Wendeln
X100
X100 Introduction to Business

2. Business: a Definition
Free Enterprise & Economic Systems
Free Enterprise & Economic Systems
Business: a Definition
The organized effort of individuals & organizations
To produce & sell… for a profit
Goods and services to customers
That satisfy a society’s needs
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3. Fundamental Business Resources
Free Enterprise & Economic Systems
Free Enterprise & Economic Systems
Fundamental Business Resources
Business
Human
Resources
Informational
Resources
Material
Resources
Financial
Resources
Goods & Services
Business must effectively combine all four resources to be successful
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4. Free Enterprise & Economic Systems
Society’s rules - for allocating its resources to produce & distribute goods & services for consumption
Impacts economic growth and development
Different societies use different approaches
U.S. economy is a ‘Modified Capitalistic’ or ‘Free Enterprise’ system
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5. Types of Economic Systems
Free Enterprise & Economic Systems
Free Enterprise & Economic Systems
Types of Economic Systems
Capitalism
Adam Smith – ‘laissez faire’ economy where society’s interest best served when individuals in that society are allowed to pursue own best interest’.
Individuals own and operate majority of businesses that provide goods and services & have right to own & sell private property.
Market Economy – businesses & individuals decide what to produce & buy. Market determines the quantity sold and prices.
Mixed Economy – the US economy is a ‘modified capitalist’ or ‘free enterprise’ system with some government participation.
Socialism
Professed aims – equitable distribution of income, elimination of poverty, distribution of social services based on need, eliminate economic waste.
Government – owns & controls key industries. Private ownership of smaller businesses may be permitted.
Command Economy – government decides what will be produced, how it will be produced, who gets what is produced and the price.
Visible Socialism – is present in many democratic governments, the most notable with a high degree of socialism include Sweden, Finland and India.
Communism
Karl Marx – ‘classless society’, where individuals contribute based on their capabilities and receive benefits based on their needs.
Government – owns almost all of the economic resources. Practice a strictly controlled type of socialism.
Command Economy – where emphasis is placed on production of goods that the government needs rather than on products consumers might want.
Communism – has dwindled with breakup of the Soviet Union & economic reforms in China. North Korea & Cuba are the best remaining examples.
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6. Key Features of the U.S. ‘Free Enterprise’ System
Free Enterprise & Economic Systems
Free Enterprise & Economic Systems
Key Features of the U.S. ‘Free Enterprise’ System
System of business in which the individuals are free to decide what to produce, how to produce it and what to sell it for.
Consumers’ freedom of choice – to allocate their own resources and spend their own money as they please
Private ownership of land and real property – by individuals and businesses as governed by laws & covenants
Competition – among businesses for the consumers’ dollars
Supply & Demand – determined by consumer demand, availability, prices and market forces
Circular Flow – of money for labor, resources & capital in exchange for goods & services
Business Cycles – driven by economic growth & contraction
$$ Profit Motive $$
For reinvestment & reward to investors
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7. Circular Flow of Resources in ‘Free Enterprise’ System
Free Enterprise & Economic Systems
Free Enterprise & Economic Systems
Circular Flow of Resources in ‘Free Enterprise’ System
Resource
markets
Product
Goods & Services
Resources Labor & Capital
Consumer Spending
Sales Revenue
Wages Rent & Interest
Income
Govt Spend
Resources
US & Local
Governments
Taxes
Taxes
Households
Consumers
Businesses
Services
Services
Govt Spend
Products
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8. Forbes Tax Misery Index
174
150
145
130
126
122
111
113
117
107
108 95 90 80 43
Misery Index is based on the Marginal Tax Rates 46 47 8 38 35 6
Adapted from 2003 data
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Free Enterprise & Economic Systems

9. Economic Trends in the US GDP (Gross Domestic Product)
Free Enterprise & Economic Systems
Economic Trends in the US GDP (Gross Domestic Product)
Real GDP = The total ‘actual’ value of all goods and services produced by all people within the boundaries of a country during a one-year period
GDP in current dollars = Includes the impact of inflation, a general rise in the level of prices of goods and services
Source: U.S. Bureau of Economic Analysis website at , accessed September 29, 2005.
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10. Free Enterprise & Economic Systems
Economic Performance The US Balance of Trade
US has a trade deficit in goods & overall balance of trade
Trade Deficit = Imports > Exports
goods deficit
U.S. International Trade in Goods and Services and the Combined Balance
Services surplus
overall deficit
Source: U.S. Department of Commerce, accessed January 3, 2003.
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11. Free Enterprise & Economic Systems
Economic Performance World Inflation Rates
Inflation rate had been falling in almost every major region of
the World – and is expected to remain low in the near future
~3% per year
average inflation
in the US
*Developing economies include most countries in Africa, Asia, the Middle East, and South America.
*Advanced economies include the U.S., Japan, Germany, France, Italy, U.K., and Canada.
Source: The World Economic Outlook: The International Monetary Fund.
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12. Free Enterprise & Economic Systems
Types of Competition
Competition - the rivalry among businesses for sales to potential customers
Pure Competition – many buyers & many sellers
Buyers and sellers must accept going price
Monopolistic Competition – many buyers &
relatively large number of sellers
Businesses compete with product differentiation
Oligopoly – market or industry with few sellers
Each seller has considerable price control
Monopoly – market or industry with only one seller
Business with monopoly has complete control over price
Natural monopoly – requiring huge capital investment
Legal monopoly – with a patent, copyright or trademark ™
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13. Free Enterprise & Economic Systems
Supply & Demand Curves
Assumes many buyers & sellers - with ‘market’ knowledge
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14. The Basis for International Business
Free Enterprise & Economic Systems
The Basis for International Business
International Business – exchanges across national boundaries
Global Business  Video
Some countries are better equipped than others to produce particular goods or services:
Absolute advantage - the ability to produce a specific product more efficiently than any other nation
Comparative advantage - the ability to produce a specific product more efficiently than any other product
Goods and services are produced more efficiently when each country SPECIALIZES in the products for which it has a comparative advantage
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15. Principle of a Nation’s ‘Comparative Advantage’
Free Enterprise & Economic Systems
Principle of a Nation’s ‘Comparative Advantage’
Nations engage in international trade – because they own resources that enable a nation to produce some goods better & more efficiently than other nations
In the past, primary sources of comparative advantage were better access to:
Lower cost Labor Markets
Financial Markets
Technology
Natural Resources
Geographic Areas
With ‘Globalization’ these sources of advantage are becoming less important
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16. Diminishing ‘Comparative Advantage’
Free Enterprise & Economic Systems
Diminishing ‘Comparative Advantage’
Why ??
Financial markets are now global
With telecommunications & the internet, geographical location per se adds very little value
Companies find it relatively easy to bring work to employees, wherever workers live
Natural resources can be imported from any location around the world
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17. Free Enterprise & Economic Systems
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Free Enterprise & Economic Systems
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