THE FREE ENTERPRISE SYSTEM CAPITALISM SECTION 3 1

THE FREE ENTERPRISE SYSTEM CAPITALISM

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

SECTION 3. 1 Capitalism Key Terms = free enterprise system = competition = price competition = nonprice competition = monopoly = risk = profit

SECTION 3. 1 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. 4

SECTION 3. 1 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.

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. 6

SECTION 3. 1 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. 7

SECTION 3. 1 Capitalism 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. 8

SECTION 3. 1 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. " 9

SECTION 3. 1 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

SECTION 3. 1 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. 11

SECTION 3. 1 Capitalism 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.

SECTION 3. 1 Capitalism 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. 13

SECTION 3. 1 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.

SECTION 3. 1 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.

SECTION 3. 1 Capitalism 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 oneclick system for online orders are pending. What are some consequences of such patents being granted?