n Chapter 3 The Free Enterprise System

1
Marketing Essentials
n Chapter 3 The Free Enterprise System
Section 3.1 Capitalism
2
SECTION 3.1
Capitalism
What You'll Learn

• Basic principles of a free enterprise system
• The role of competition
• The importance of risk and profit

3
SECTION 3.1
Capitalism
Why It's Important
In this chapter, you will develop an
understanding of how our economic system
operates. You will learn how prices are
determined, as well as what roles the government
and consumers play in the free enterprise system.
4
SECTION 3.1
Capitalism
Key Terms

• free enterprise system
• competition
• price competition
• nonprice competition
• monopoly
• risk
• profit

5
SECTION 3.1
Capitalism
Basic Principles
In the United States, we have the freedom to make
decisions about where we work and how we spend
our money. A free enterprise system encourages
individuals to start and operate their own
businesses.
6
SECTION 3.1
Capitalism
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 you want as long as it is not prohibited
by law.
Slide 1 of 3
7
SECTION 3.1
Capitalism
Freedom of Ownership
In a free enterprise system people are encouraged
to own businesses, but there are restrictions on
how and where businesses may operate.

• Businesses that make things may be forced to
  comply with certain environmental measures.
• Businesses may be restricted in where they can
  locate.

Slide 2 of 3
8
SECTION 3.1
Capitalism
Freedom of Ownership
If you get a patent on an invention, anyone who
wanted to manufacture your product would have to
pay you for its use through a licensing agreement.

• Example A T-shirt manufacturer gets a licensing
  agreement with the NFL to produce NFL logo
  T-shirts.

Slide 3 of 3
9
SECTION 3.1
Capitalism
Competition
Competition is the struggle between companies for
customers. Competition is an essential part of a
free enterprise system. It forces businesses to
produce better quality goods and services at
reasonable prices.
10
SECTION 3.1
Capitalism
Price Competition
Price competition focuses on the sale price of a
product. The assumption is that, all other things
being equal, consumers will buy the products that
are lowest in price.

• Example Wal-Mart advertises "Always the Lowest
  PriceAlways."

11
SECTION 3.1
Capitalism
Nonprice Competition
In nonprice competition, businesses compete based
on

• the quality of the products, service and
  financing
• business location
• reputation
• the qualifications or expertise of their
  personnel

12
SECTION 3.1
Capitalism
Monopolies
When there is no competition and one firm
controls the market for a given product, a
monopoly exists. Monopolies are not permitted
under a free enterprise system because they
prevent competition.
13
SECTION 3.1
Capitalism
Risk
Risk is the potential for loss or failure in
relation to the potential for improved
earnings. As the potential for earnings gets
greater, so does the risk.
14
SECTION 3.1
Capitalism
Profit
Profit is the money earned from conducting
business after all costs and expenses have been
paid. Profit is the engine that drives a free
enterprise system.
15
SECTION 3.1
Capitalism
Economic Cost of Unprofitable Firms

• Unprofitable businesses lay off employees.
• Their stock prices fall, so they have
  fewerresources and investors lose money.
• They cut back on research and development.
• Their suppliers and transporters suffer.
• The government receives less in taxes and pay
  more in social services.

16
SECTION 3.1
Capitalism
Economic Benefits of Successful Firms

• Profitable businesses hire more people.
• Their investors earn from investing in the
  company.
• Their vendors make more money.
• Companies and employees give more to charities.
• The government receives more taxes.
• Competition benefits the consumer.

17
3.1
ASSESSMENT
Reviewing Key Terms and Concepts
1. Provide an example of how freedom of
ownership may be limited by government. 2.
Provide an example of a business that uses
price competition and one that uses nonprice
competition. 3. What principle of free
enterprise provides the incentive for
people to risk their money on business
ventures?
Slide 1 of 2
18
3.1
ASSESSMENT
Reviewing Key Terms and Concepts
4. What is risk, and why is it relevant to a
free enterprise system? 5. How do
profitable businesses benefit the economy?
Slide 2 of 2
19
3.1
ASSESSMENT
Thinking Critically
With computer technology becoming an integral
part of business operations and the growth of
Internet related industries, applications for
patents for new business processes are
increasing. Patents for a one-click system for
online orders are pending. What are some
consequences of such patents being granted?
20
Marketing Essentials
End of Section 3.1