Chapter 28

Our free enterprise system

Free Enterprise System Also called a market economy or

capitalism Producers and Consumers are free to

engage in business transactions with minimal government interference.

Producers- are the manufacturers or makers of goods and services for sale

Consumers are the buyers and users of goods and services.

Everyone is a consumer because we all use goods and services.

Scarcity Wants are unlimited however the

resources for producing the products to satisfy these wants are limited. This basic economic problem is called scarcity.

A country’s economic system determines what products its businesses will produce with its limited resources

To make a profit- producers must provide goods and services that consumers will buy

Scarcity As an individual consumer, you have

limited resources. You must decide what to buy with your limited money to achieve the greatest satisfaction or utility.

Your spending decisions and those of other consumers determine which products will succeed and which will fail and leave the market

Supply and Demand Supply is the quantity of goods and services

that producers are willing and able to provide. Demand is the willingness and ability of

consumers to purchase goods and services at certain prices.

Supply and Demand Increased demand creates a situation in

which the supply of the product is not sufficient to satisfy all consumers who want to buy it. As a result, producers can raise their prices

The high prices bring large profits to the producers

Large profits prompt current producers to make more of the product and attract other producers to start providing the product, increasing the supply.

Supply and Demand Supply then exceeds demand and consumers can

pick and choose. In order to entice consumers to buy their product instead of their competitors’, producers reduce their prices

Reducing prices in turn, lowers profits, and producers begin to produce less

Eventually the product reaches its EQUILIBRIUM PRICE. This is the price at which the quantity supplied equals the quantity demanded of the product. At this price, there is just enough of the product available for all consumers who want to buy it.

Consumers Consumers have the ultimate power in a free

enterprise system. Consumers determine what is produced and at what price. Collectively, consumer buying decisions direct the production of goods and services.

Producers Producers also have power in a free

enterprise system, because they can employ various techniques to influence consumer buying decisions. They use advertising and other marketing strategies to try to increase demand for their products.

You must understand the role of advertising and other marketing strategies on our economic system and become a careful consumer

Free Enterprise System Three basic conditions exist for a free

enterprise system to function smoothly Competition Purchasing Power Informed Consumers When these three are in place, the best

possible product are produced, at the highest quality and at the best price.

Illegal Business Practices Illegal business practices can reduce

competition and result in higher prices. Price Fixing is an illegal agreement

among competitors to sell a good or service for a set price.

There is no real competition because prices have been predetermined or fixed.

It prevents the forces of supply and demand from determining prices freely in the marketplace, it impedes free enterprise and the government

Purchasing Power

For free enterprise to operate, citizens must have the ability to buy.

Purchasing power is the value of money, measured in the amount of goods and services that it can buy.

In periods of inflation, when prices are generally rising in the economy, purchasing power decreases.

Purchasing power also declines during periods of recession. People who lose their jobs or have their wages reduced cannot buy as many goods.

Transfer Payments The government also shifts purchasing

power among citizens by making transfer payments.

Transfer payments are government grants to some citizens paid with money collected from other citizens, generally through taxes.

For the receivers, transfer payments are unearned income.

This provides purchasing power for needy people. Welfare, Social Security and Veteran Benefits are all transfer payments.

Deceptive Practices

Consumers must educate themselves to recognize a potential fraud before they become victims.

Bait and Switch: illegal sales technique in which a seller advertises a product with the intention of persuading consumers to buy a more expensive product.

The bait is the bargain product that gets customers into the store.

Switch- is when the salesperson switches them to a more expensive product.

Deceptive Practices: Fake Sale Educated consumers are the best way to

protect consumers against deceptive practices.

Fake Sale: the most common of all consumer fraud. A merchant advertises a big sale but keeps the items at regular price or make the price tags look like a price reduction when there actually is none.

Deceptive Practices:Lowballing Low balling: advertising a service at an

unusually low price to lure customers, and then attempting to persuade them that they need additional services.

For example a repair shop may offer special on brake realigning. But when the mechanics inspect the brakes, they find several other “necessary” repairs.

To protect yourself: state that you want no repairs other than those agreed upon unless the repair shop informs you of the additional cost ahead of time and you choose to authorize the extra repairs.

Pyramid Schemes Mostly illegal multilevel marketing plans

that promise distributors commissions from their own sales and those of other distributors they recruit. A cash investment of some kind is usually required to become a distributors. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors.

http://www.sec.gov/answers/pyramid.htm

Pyramid Schemes

But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.

Multilevel Marketing Businesses Some are well run businesses (Tupperware

parties, Pampered Chef, Thirty-One, Partylite, etc.)

If you get involved, as long as your main goal is selling a product, then you are probably ok.

Deceptive Schemes: Pigeon Drop Pigeon drop refers to any method used by

experienced con artists to convince vulnerable people to invest in phony investments, swampland real estate, or other swindles. The pigeon is the unsuspecting consumer. Con artists often target trusting people who know little of such scams but do have a source of money

Other types of Fraud Door to door solicitors Health claims (miracle pills) Infomercials-guarantee claims are

exaggerated Internet Fraud Telemarketing Fraud

Responsible Consumer Be suspicious Become educated before buying products Food Drug and Cosmetics Act of 1938

requires truthful labeling on these products as well as includes the weight or volume of contents.

Other labeling acts have followed.

Responsible Consumer Read labels Check containers carefully Read contracts Keep receipts and warranties Ask for references Be loyal Check up on businesses Wait a day for a major purchase

Smart Shopping Be aware of prices Shop around Understand sale terminology

10 for 10 Coupons Rebates: attractive but 40% never get redeemed

Plan your purchases Avoid impulse buying Compute unit prices Compute total cost

Smart Shopping 10 for $10 doesn’t mean you have to buy 10

to get the sale price Bargain/Haggling—some stores will let you! Store brands or generics cost less than name

brands but use same ingredients

Report Fraud Consumer protection agencies are available at

many levels: Local: St. Louis Better Business Bureau State: Missouri Attorney General Federal: Federal Trade Commission

You can report suspicions of fraud by email, phone or in person to a consumer protection agency