Transcript Chapter 03 Section 3.1

Marketing Essentials
n Chapter 3 The Free Enterprise System
Section 3.1 Capitalism
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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
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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.
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Capitalism
Key Terms
 free enterprise system
 competition
 price competition
 nonprice competition
 monopoly
 risk
 profit
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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.
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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.
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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.
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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.
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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.
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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."
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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
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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.
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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.
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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.
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Capitalism
Economic Cost of Unprofitable Firms
 Unprofitable businesses lay off employees.
 Their stock prices fall, so they have fewer
resources 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.
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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.
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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?
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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?
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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?
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Marketing Essentials
End of Section 3.1
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