free enterprise. what is free enterprise? free enterprise: encouraging private ownership and...
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Free Enterprise
What is Free Enterprise?
• Free Enterprise:
Encouraging private ownership and individual initiative (independently outside of influence or control)
Tradition of Free Enterprise• America is considered the “land of
opportunity”
• History of social and political commitment to entrepreneurship and competition in the marketplace.
Examples: Rockefeller, Carnegie, Henry Ford
Basic Principles of Free Enterprise
1. Profit Motive
–Encourages Individuals to take the risk of investing in business
– Individuals make decisions that will maximize profits
–Requires financial discipline = individuals are responsible for success or failure
–Rewards innovation
–Allows creative companies to grow
– Improves productivity = higher profits to more efficient company
Basic Principles of Free Enterprise
2. Open Opportunity
–EVERYONE can compete in the marketplace
3. Economic Rights
- Legal equality = everyone has the same legal rights- Private property rights = you control your possessions as you wish.- Free contract- Voluntary exchange = you decide what and when to buy and sell
Role of Government
4. Copyrights – Grants an author exclusive rights to publish and sell their work.
Piracy: Downloading of music, burning CD’s (Examples: Napster, Limewire etc.)
5. Patent – Gives inventor exclusive right to produce and sell a product for 20 years.
Review
• What Economic Philosopher would agree with the free enterprise system? Why?
• How is a patent different than a copyright?
• What is the Number 1 motive people have to enter into the free market system?
• What risk do Entrepreneurs take to enter the free market?
• Productivity: The value of output produced
• Production: The creation of value or the producing of
articles that have exchange value.
Factors that Effect Economic Decisions
Consumption• The amount of goods and services
used
• Goods- Products
• Services- things provided• BUYERS = CONSUMERS
• SELLERS = PRODUCERS
BUYERS & SELLERS COME TOGETHER TO EXCHANGE THINGS OF VALUE
• Specialization:
• Focusing your efforts on a limited number of activities
• Doctors, Teachers, Lawyers
• Efficiency:
• Performing in the best possible manner with the least waste of time and resources
• Division of Labor:
• Each person is given a specific task to repeat over and over again.
• Henry Ford…assembly line
Competition in the Marketplace
MONOPOLY
• ONLY ONE PRODUCER• NO COMPETITION• CHARGE HIGHER PRICES• PRODUCE LESS• PROVIDE LESS QUALITY (WHY?)
• What is an example of a current monopoly?
OLIGOPOLY
• Only a few producers• Operate between competitive
markets and monopolies
• Examples: Utilities (what are they?)
• CONGLOMERATES:
• Large Companies that combine to form larger companies
• Example: General Electric (GE) – They own NBC, financial services and health care services
• Multi-National Conglomerators: CONGLOMERATE with companies operating in more than one country.
• Example: BP (British Petroleum)
MERGER• The process when one firm buys/joins with
another.• Horizontal Merger-
• Joins two or more firms competing in the same market with the same good or service.
• Vertical Merger -
• Joins two or more firms involved in different stages of producing the same good or service. A vertical merger can allow a firm to operate more efficiently.
• An example of a vertical merger is a car manufacturer purchasing a tire company.
Market Structure
• Competition
• The rivalry between sellers to attract customers while lowering costs
• Cooperation
• the combination of persons for purposes of production, purchase, or distribution for their joint benefit
Review
• Why do Monopolies tend to produce less output, charge higher prices, and provide less quality than competitive markets?
• What is the difference between competition & cooperation?
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