1. The Free Enterprise Chapter 5.1 2.3 Analyze the Free Enterprise

2. Our Basic Economic Freedoms Freedom of Ownership –Personal Items, businesses, private property, Intellectual property Freedom to Compete Freedom to Take a Risk Freedom to Make a Profit –Profit is the driving motive in our economy

3. Intellectual Property Rights Patent: Invention for up to 20 years Trademark: word, name, symbol or color identifying a business or product – life of business Copyright: writings, music, artwork for life of author plus 70 years

4. Competition Struggle between companies for customers Benefits: –Lower Prices –Better Quality

5. Two Types of Competition PRICE Focuses on the sale price of a product NONPRICE Compete on the basis of factors not related to price - services - location - reputation, etc.

6. Monopoly There is no competition and one firm controls the market for a given product. Gives exclusive control over a product or means of production –Microsoft = Technology dominance NOT LEGAL IN A DEMOCRACY –Exception = utilities

7. Risk = Profit Risk = The potential for loss or failure. –Money, investments, reputation, –85% of new product fail in first year! You must take risk in order to earn profit Profit is the money earned after all costs and expenses have been paid. –1-5% of sales Profit provides the incentive for a person to take risk.

8. How are prices determined in our market place? The interaction of Supply and Demand! 2.6 Evaluate the relationship of cost/profit to supply/demand

9. Law of Demand DEMAND: consumers’ willingness and ability to buy products The lower prices create higher demand; higher prices have a lower demand Exception to the Law: Diminishing Marginal Utility: Consumers will buy just so much of a given product

10. Elasticity of Demand (2 types) Elastic Demand – Slight change in $ price $ = creates a LARGE change in demand –Products are items of WANT, not in urgent need, substitutes are available Inelastic Demand – Changes in $price$ = creates very little change in demand –Products are necessities, in urgent need, have no available substitutes

11. Law of Supply SUPPLY: The amount of goods producers are willing to make and sell At higher prices, producers will offer a large quantity of products for sale; at lower prices, producers offer fewer products for sale

12. Supply and Demand Theory Terms to know! Equilibrium: The point at which Supply and Demand are equal –The goal!! Surplus: Supply exceeds Demand; Prices will typically lower to reach demand (equilibrium) Shortage: Demand exceeds Supply; Prices will generally rise until producers can meet the demand (equilibrium)