Free Enterprise System In Introduction to Economics

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Free Enterprise SystemIn Introduction to
Economics

• Philosophy that our nations founders believe
  that individuals should have the freedom of
  choice.
• In theory, the free enterprise system encourages
  individuals to start and operate their own
  businesses without government involvement.

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Competition

• Struggle between companies for customers that is
  both healthy and vital to out free enterprise
  system.
• Price Competition
• Focuses on the sale price of a product.
• Non-price Competition
• Businesses choose to compete on the basis of
  factors that are not related to price.

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Competition, cont.

• Direct Competition
• Product or brand which competes in the same
  product category.
• Indirect Competition
• A product that is in a different category
  altogether but which is seen as an alternative
  purchase choice.

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Competition, cont.

• Monopoly
• Exclusive control over a product or the means of
  producing it.
• Are Monopolies Fair?
• Risk
• The potential for loss or failure.
• Profit
• The money earned from conducting business after
  al costs and expenses have been paid.

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Economic Benefits of Successful Firms Vs.
Economic Cost of Unprofitable Firms
The Role of Government 1. Provide general
services (fire, police, education) 2. Support
business (SBA, loans for businesses) 3. Regulates
business (worker, business protection) 4. Competes
wit small business (TVA, Mail, Amtrack) The
Role of Consumers 1. Pick the winners 2. Determin
e how much demand 3. Keep it a customer oriented
society
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Economic Systems

• System by which a nation decides how to use its
  resources to produce and distribute goods and
  services.
• 3 Basic Economic Questions
• What is produced?
• How is it produced?
• For whom is it produced for?

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How Does Indirect Competition Work?
Scarcity The difference between needs and wants,
and available resources. Do you want a new car?
Do you have the resources?
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Unlimited Needs Wants
Limited Resources
Scarcity
Choices
What
How
For Whom
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Economic Systems, cont.By answering the 3 basic
questions, you will fit into 1 of 2 categories.

• Market Economy
• No government involvement in economic decisions.
• Command Economy
• The government answers the economic questions.
• What countries economies are a pure market or
  pure command?

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Mixed Economies

• Capitalism
• The economic market system characterized by
  private ownership of businesses and marketplace
  competition.
• Socialist
• Increased amount of government involvement in
  order to reduce the differences between rich and
  poor.
• Communist
• Totalitarian--that means that the government
  runs everything.

WHO DOES THIS SOUND LIKE?
GERMANY, FRANCE, AUSTRALIA
CUBA, NORTH KOREA
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Mixed Economy, cont.

• Privatization
• Process of selling government-owned business to
  private individuals.

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Factors of ProductionEconomist term for
resources.

• Capital
• The money needed to start and operate a
  business, which also includes the goods used in
  the production process.
• Labor
• All the people who work in the economy.
• Land
• Refers to everything in its natural state.
• Entrepreneurhsip
• Refers to the skills of the people who are
  willing to risk their time and money to run a
  business.

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Production, cont.

• Infrastructure
• The physical development of a country, which
  includes the roads, ports, sanitation facilities,
  and utilities.
• ResourcesAll the things used in producing goods
  and services.

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Economics Basics

• Demand
• Refers to consumer willingness and ability to
  buy products.
• Supply
• The amount of goods producers are willing to
  make and sell.
• Equilibrium
• Exists when the amount of
• product supplied is equal to
• amount of product demanded.

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Economics Basics, cont.

• Surplus
• Occurs when supply exceeds demand.
• Shortages
• Occurs when demand exceeds the supply.

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Demand and Supply Continued

• The Law of Demand The quantity of a good
  demanded is inversely (negatively, indirectly)
  related to its price, other things constant.
• The Law of Supply The quantity of a good
  supplied is directly (positively) related to its
  price, other things constant

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The Demand Schedule and Demand Curve for MP3
songs.
Demand curve
Demand schedule
1.25
Quantity
Price
Demanded
1.25


8
1.00
1.00


14
0.75


20
0.75
0.50


26
Price
0.25


32
0.50
D
The demand curve slopes downward because of the
law of demand
0.25
-
2
8
14
20
26
32
Quantity
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Changes in Quantity Demanded
P
D
An increase in the market price of MP3s will
decrease the quantity (amount) demanded
Q
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Changes in Demand

• Changes in demand can be caused by changes in,
• Consumer Income
• The prices of related goods
• Consumer expectations
• The number of consumers in the market
• Consumer tastes or preferences

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Changes in Income Normal and Inferior Goods

• Are there any goods that you reduce your
  consumption of when your income goes up?
• A normal good is a good for which demand
  increases as consumer income rises
• An inferior good is a good for which demand
  decreases as consumer income rises

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The prices of related goods Substitutes and
Complements

• Substitutes are goods that are related in such a
  way that in increase in the price of one good
  leads to an increase in demand for the other good
• Complements are goods that are related in such a
  way that an increase in the price of one leads to
  a decrease in the demand for the other

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The Supply Schedule and Supply Curve for MP3s
Supply schedule
Quantity
Price
Supplied
1.25


28
1.00


24
0.75


20
0.50


16
0.25


12
The supply curve slopes upward because of the law
of supply
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Changes in Quantity Supplied (Increases and
Decreases)
P
An increase in the market price of MP3s will
increase the quantity supplied
S
Q
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Changes in Supply

• Changes in supply can be caused by changes in,
• Technology
• The prices of resources used in production (input
  prices wages, interest, rent)
• Producer expectations
• The number of producers

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Market equilibrium
a snap shot
P
D
S
In equilibrium, the plans of buyers match the
plans of sellers
Pe
a.k.a. the market clearing price
Q
Qe
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Market Schedules and Equilibrium for MP3s
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ProductivityThe output per worker hour.

• Gross Domestic Product (GDP)
• The measure of the goods and service produced
  using labor and property located in this country.
• Gross National Product (GNP)
• Everything produced by U.S. citizens here or
  abroad.
• Standard of Living
• Measurement of the amount
• of goods and services that a
• nations people have.

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Inflation

• Rising Prices.
• Consumer Price Index (CPI)
• Measures the change in price over a time of some
  400 specific goods and services used by the
  average urban household.

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Business CycleReoccurring movement or changes in
the economy that goes through four stages

• Prosperity
• Period of economic growth.
• Recession
• Period of economic slowdown.
• Depression
• Period of prolonged and deep recession.
• Recovery
• Period of renewed economic growth.