Market-oriented Economic Systems & Free Enterprise · Market-oriented Economic Systems & Free...
Transcript of Market-oriented Economic Systems & Free Enterprise · Market-oriented Economic Systems & Free...
Market-oriented Economic Systems
& Free Enterprise
Chapter 5(2006 Edition)
The Free Enterprise System
Encourages individuals to start
and operate their own
businesses without government
involvement.
Basic Principles of Free Enterprise
Freedom of Ownership
Competition
Risk
Profit
Intellectual Property Rights
• Are protected in a free enterprise system
• Patents – If you patent an invention, you alone own the rights to that item or idea.
• Trademark – A word, name, symbol, sound, or color that identifies a good or service and that cannot be used by anyone but the owner.
• Copyright – Involves anything that is authored by an individual, such as writings, music, and artwork.
Basic Principles of Free Enterprise
• Freedom of Ownership – We can own just
about anything. The system encourages
individuals to own businesses.
• You can buy anything you want, as long as
it’s not illegal.
Competition
• Competition : The struggle between companies for customers.
Two kinds:
– Price Competition: Focuses on the price
– Nonprice Competition: Factors not related to price such as quality, service, location, reputation.
Monopolies
• When there is no COMPETITION and one
firm controls the whole market.
• U.S. Government allows only a few
monopolies, such as utility companies.
Called a natural monopoly.
Business Risk
• Risk – The potential for loss or failure
As the potential for earnings gets greater, so
does the risk.
One of every three businesses in the U.S. fails
after one year.
Introducing new products is also risky. Up to
85% of new products fail in the first year.
Business Profit
• Profit – The money earned from conducting
business after all costs and expenses are
paid.
Profit is the motivation for taking a risk.
Profits are high when sales are high and costs
are low.
As the
potential for
PROFIT
increases, the
RISK also
INCREASES.
Economic Cost of Unprofitable
Firms:
• Laying off of employees
• Investors can lose money
• Fewer resources with which to conduct
business
• Cut backs on research and development for
new products
• Cut backs on purchase of goods and
services needed for operation
Unprofitable firms (cont.)
• Affects profitability of suppliers
• Government suffers. Less tax collected,
rise in unemployment.
Economic Benefits of Successful
Firms:
• Hire more people and pay them well
• Employees have better benefits and higher
morale
• Investors earn money, which they spend or
invest
• Vendors and suppliers make more money
• Government makes more money in taxes
Supply and Demand
• In a market-oriented economy, supply and
demand determine the prices and quantities
of goods and services produced.
Supply
• The amount of goods producers are
willing to make and sell
Demand
– The amount of goods consumers are
willing to buy
Law of Supply
• As prices rise, so will the quantity
supplied.
• Price and quantity supplied move in
the same direction.
PriceQuantity
Supplied
Look at Law of Supply through the eyes of the “Supplier”
Law of Demand
• As prices increase, the quantity demanded
decreases.
• Price and quantity demanded move in the
opposite direction.
PriceQuantity
Demanded
Look at Law of Demand through the eyes of the “Consumer”
Supply & Demand
Surpluses: Occur when supply
exceeds demand
Shortages: Occur when demand
exceeds supply
Equilibrium: The amount being
supplied is equal to the
amount being demanded.
Supply & demand are
balanced.
All of the activities involved in
producing and marketing goods/services.
Consumer Market: Sells products/services to
individuals.
Industrial Market: Sells products/services to
businesses (B2B)
What is Business?
Business Classifications
• Size & Scope
• Purpose
• Industry & Markets
Business Classifications
Size and Scope
– Large vs. Small Size
• Small businesses have less than 100 employees.
• 95% of all businesses are classified as small
businesses.
– Domestic vs. Global
• Domestic market is a single country… global is
among nations.
Business Classifications
Purpose
Profit vs. Nonprofit
• Profit (Microsoft/McDonald’s)
• Nonprofit: Functions like a business but uses
money it makes to fund it’s identified cause.
(YMCA, Boys/Girls Clubs of America)
Public vs. Private
Public organizations provide a non-profit service or are
associated with the government.
(Military, Schools, Social Security Administration)
Business Classifications
• Industry and Markets
Industry: Consists of a group of establishments primarily engaged in producing or handling the same product or service
• U.S, Canada, & Mexico created NAIC…A six-digit coding system to classify all economic activity into 20 industry sectors.
Industry & Consumers are
Interrelated
• Derived Demand
As consumer demand increases, it positively effects the industries associated in supplying that product.
• Industries will study consumer trends to look for opportunities to increase business.
Example:
Consumers start buying more automobiles →
Dealers need more cars to sell →
Manufacturers need increased supply of tires, radios, batteries, electronic parts, etc.
4 Functions of Business
• Regardless of the type of business, there are
four main function involved in an
organization’s operation
Marketing
Management
Finance/Accounting
Production
“My Mother Fixes Awesome Pancakes”
• Marketing: All activities from the time a
product leaves the producer or manufacturer
until it reaches the final consumer.
4 Functions of Business
• Management: The process of achieving
company goals by effective use of resources
4 Functions of Business
4 Functions of Business
• Finance and Accounting:
– Finance involves money management
– Accounting keeps track of a company’s
financial situation
4 Functions of Business
• Production: The process of creating,
growing, manufacturing, or improving
goods and services.
– Procurement: Involves buying and reselling
goods that have already been produced.