marketing essentials chapter 3: the free enterprise system section 3.1 capitalism

Marketing EssentialsChapter 3: The Free Enterprise SystemSection 3.1 Capitalism

Key Terms• free enterprise system

• competition

• price competition

• nonprice competition

• monopoly

• risk

• profit

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.

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.

CapitalismFreedom 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.

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.

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.

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 Price—Always."

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

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.

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.

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.

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.

CapitalismEconomic 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.

THE END

Chapter 3.2: Government & Consumer Functions

Key Terms

• demand

• supply

• equilibrium

• surpluses

• shortages

Government & Consumer Functions

The Role of Government

• The United States is a modified free enterprise system. In such a system, the government acts as:

• provider of services• supporter of business• regulator• competitor


Government as Provider of Services

• To ensure the safety and general welfare of people in the United States, the government provides:

•military protection•police protection•fire protection•free public education•job training

•roads and bridges•public libraries•welfare system•health care for the elderly and poor


Government as Supporter of Business

• The government provides disaster assistance to help both businesses and homeowners rebuild after disasters.

• The Small Business Administration provides counseling and educational materials to support business.

• The government is the largest consumer of goods and services in the U.S.


Government as Regulator

• In the United States, most laws are designed to protect the safety, health, and welfare of individuals and the freedom of businesses to operate in our free enterprise economic system.


Government as Regulator: Consumer and Worker Protection

• The government protects workers and consumers through the following federal agencies:

• Food and Drug Administration (FDA)• Equal Employment Opportunity Commission (EEOC)• Occupational Safety and Health Administration (OSHA)• Consumer Product Safety Commission (CPSC)


Government as Regulator: Consumer and Worker Protection

• Environmental Protection Agency (EPA)

• The Securities and Exchange Commission (SEC)


Government as Regulator: Business Protection

• The government provides laws and regulations regarding patents, copyrights, and trademarks.

• The government regulates trade with other countries to protect national security and to protect U.S. companies from unfair competition.



• The Sherman Antitrust Act, passed in 1890, outlawed monopolies in business, protecting competition.

• The Clayton Antitrust Act, passed in 1914, closed loopholes in the Sherman Antitrust Act.

• The Federal Trade Commission (FTC) enforces both acts.



• The Federal Reserve System is the nation's banking system. The Federal Reserve Board of Governors controls interest rates, increasing or decreasing rates to manipulate economic activity and inflation.


Government as Competitor

• The federal government runs three businesses:• Tennessee Valley Authority provides

electricity to the rural South• U.S. Postal Service provides national

mail delivery• Amtrak provides passenger rail service,

established under the Rail Passenger Act of 1970.


The Role of the Consumer

• Consumers do two major things in the marketplace:• They pick the winners—the products and

businesses that will be in the marketplace tomorrow.

• They determine the demand for any given product, and therefore help determine prices.


Deciding Which Businesses Survive

• Consumers decide which businesses will survive by "voting" with each purchase. The more votes (sales) a product gets, the more likely that product or company will survive.


Determining Prices

• Prices in a free enterprise system are determined by supply and demand.

• Supply and demand interact to determine the price customers are willing to pay for the number of products producers are willing to make.


Determining Prices

• Demand refers to consumer willingness and ability to buy products. According to the law of demand, if the price is low enough, demand for a product usually increases.


Determining Prices

• Supply is the amount of goods producers are willing to make and sell.

• higher prices = more products for sale• lower prices = less products for sale


Determining Prices

• Equilibrium exists when the amount of product supplied is equal to the amount of product demanded.


Surpluses

• Surpluses of goods occur when supply exceeds demand. When this happens, businesses respond by lowering their prices in order to encourage people to buy more of the product.• Example: When grocery stores have lots of

produce, they price the produce low to encourage people to buy.


Shortages

• When demand exceeds supply, shortages of products occur. When shortages occur, businesses can raise prices and still sell their merchandise.• Example: An oil shortage increases the price of

gasoline, so consumers who want to drive their vehicles pay the higher price.

The Determinants of Demand

Prices of Complimentary

Goods

Changes In

PopulationIncome

TasteAnd

Preferences

Existence of

Substitutes

Demand

THE END

marketing essentials chapter 3: the free enterprise system section 3.1 capitalism

Documents

free enterprise system

free enterprise systemsection

licensing agreement

given product

social services

lowest pricealways

reasonable prices

sale price