1. The Free Enterprise System
Chapter 3
The Free Enterprise System

2. 3.1 Objectives
List and describe the principles of a free enterprise system
Explain the role of competition
Define the importance of risk and profit

3. Capitalism 3.1
The free enterprise system- encourages individuals to start and operate their own businesses without government involvement

4. Freedom of Ownership
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
You can buy anything as long as it’s not prohibited by law
Must get permission to use another company’s symbol, name, or product

5. Competition The struggle between companies for customers.
Forces businesses to produce better quality products
Develop new products and improve old ones
Wider selection of products
Increases the nation’s output of goods and services

6. Competition Price competition- focuses on the sale price of a product
All other things equal: customers will buy the lowest priced items

7. Competition
Nonprice competition- businesses choose to compete on factors that are not related to price
Quality of products
Service and financing
Business location
Reputation
Businesses usually choose one strategy or the other, price or nonprice NOT both

8. Competition
Monopolies- when there is no competition and one firm controls the market for a given product
Not permitted under free enterprise because it prevents competition
Microsoft is an example- stifles innovation and hurts customers

9. Competition
Risk
Potential for loss or failure in relation to the potential for improved earnings
As the potential for earnings gets greater, so does the risk
Example- putting money in the bank is less risky than investing in the stock market; but you can’t earn as much in the bank

10. Competition
Profit
The money earned from conducting business after all costs and expenses have been paid
The motivation for taking the risk of starting a business
People get into business to make a profit

11. Economic Cost of Unprofitable Firms
Lay off employees
Investors sell their stock
Cut back on research and new product development
Government suffers- bad businesses pay less in taxes

12. Economic Benefits of Successful Firms
Hire more people and pay them well
Investors get more money so they re-invest
Government makes more money on taxes
More likely to donate to charities

13. Assignment Page 47 Reviewing Key Terms and Concepts #1-5
Thinking Critically #6

14. 3.2 Objectives
List and describe the roles government plays in our free enterprise system
Explain the supply and demand theory

15. The Role of the Government
Provider of Services
To ensure the safety and welfare of the people in the United States the government provides:
Military
Police
Fire protection
Free public education

16. The Role of the Government
Supporter of business
Disaster services
SBA-Small Business Administration
The largest consumer of goods
Military uniforms to defense equipment
Establishes trade alliances with other countries

17. The Role of the Government
Regulator
Making laws designed to protect the safety, health, and welfare of individuals and the freedom of business

18. The Role of the Government
Consumer and Worker Protection
FDA- food and drug administration-regulates prescriptions and the quality of food products
EEOC-equal employment opportunity commission- regulates job placement and discrimination

19. The Role of the Government
OSHA- occupational safety and health administration- safe working conditions
CPSC-consumer product safety commission- makes sure products are safe for consumers, recalls on vehicles

20. The Role of the Government
Business Protection
Patents, Copyrights, and Trademarks- these protect businesses for a period of time from having others copy their creative ideas and symbols
Trade restrictions-with other countries, to protect domestic industries

21. The Role of the Government
Sherman Antitrust Act- law passed to ban monopolies and anything that would limit trade in the U.S. (1890)
Clayton Antitrust Act-to reduce loopholes in the Sherman act; created the federal trade commission to enforce both acts

22. The Role of the Government
Competitors
Tennessee Valley Authority- provides electricity to parts of the rural south established during the great depression
U.S. Postal Service- provides mail delivery nationwide
Amtrak- passenger rail service established in 1970

23. The Role of the Consumer
Deciding which businesses survive
Consumer oriented society
Power to decide:
Which products are made
Which companies will stay in business

24. The Role of the Consumer
Determining Prices
Supply- the amount of goods producers are willing to make and sell at a certain price
Demand- consumer willingness and ability to buy products at a certain price
Surpluses- when supply is greater than demand
Shortages- when demand is greater than supply
Equilibrium- when supply and demand are equal

25. Assignment Page 54 Reviewing Key Terms and Concepts #1-5
Thinking Critically #6