Chapter 5The Free Enterprise System

Chapter 5.1 Objectives

•Explain the Characteristics of a Free Enterprise System •Distinguish between price and nonprice competition •Explain the theory of supply and demand

free enterprise system

The basis of this system is for people to have the freedom to: •own personal property•compete•take risks•make a profit

  This system encourages individuals to start and operate their own business in a competitive system, without government involvement.

In general, how are prices determined in this system?

How do we classify the U.S. in regards to the free enterprise system?

Freedom of Ownership As an individual, this means you can:•buy stuff•sell stuff• lease stuff•rent stuff•give stuff away•keep stuff and use it for yourself

  ...as long as it is allowed by law!

Business Ownership Entrepreneurs start and operate businesses they own. Other ways people can own businesses is by investing their money in them, but not working in the business. These people buy shares of stock. A successful company's stock price rises because more people want to buy that stock.  What is this another example of?

Intellectual Property Rights

patents                  trademarks                 copyrights    Define each and explain how long each are good for.  How does someone else gain permission to use one of these?

What is the difference between these intellectual property rights and a trade secret?    

Competition-the struggle for customers 1.How does competition benefit consumers?

   2. How does competition increase our standard of living?  What are TWO basic strategies businesses use to compete? 

price competition - focuses on the sale price of a product.  What are some examples of companies that use this strategy?   nonprice competition - focuses competition on factors not related to price.Can you think of examples for this strategy? 

As competition increases, many companies try to compete by using both strategies.

monopoly- exclusive control over a product or the means of producing it. Why do free enterprise systems outlaw monopolies?

Discussion: Microsoft and utility companies

business risk- Define it!

business risk- the potential for loss or failure 

risk vs. reward 

low risk, low reward....high risk, high reward What are some examples of this?

•money in the bank vs. money in the stock market

•Money starting a business can payoff big time, OR a business can fail. 1/3 of every business in the U.S. fails after ONE year!!

•Liability, natural disasters, increased competition

•You want to succeed? Make new products!!

Not an easy thing...new product introductions are very costly AND as many as 85% of new products fail in the first year!!

profit - money earned from conducting business after all costs and expenses have been paid. (only 1-5% of sales for most businesses)

Profit is the "reward" in the risk vs. reward equation.

Profit is the motivation for those who start and operate businesses. That motivation is the key to satisfying customers and running a business efficiently. 

DISCUSS

The economic costs of unprofitable firms:

•worker layoffs•money losses for investors•stresses on government

 

DISCUSS

 The economic benefit of successful firms:

•higher employment, higher wages, better benefits, higher morale

• investors gain money, which can spur reinvestment• increased consumer spending, increaded business

opportunities•government receives more funds, and needs to

provide less assistance

supply-the amount of goods producers are willing to make and sell*the law of supply states that price and quantity supplied move in the same direction  demand-refers to the consumers' willingness and ability to buy products*the law of demand states that price and quantity demanded move in the opposite direction

What is the relationship between supply and demand?

    

Go to Figure 5.1 on page 107

Supply and Demand-Discuss and provide examples

What is the term used when supply exceeds demand?  What is the term used when demand exceeds supply?   What is the term used when demand is equal to supply?  

Chapter 5.2 Objectives

•Compare for-profit and nonprofit organizations •Distinguish between public and private sectors

 •List the major types of businesses in the industrial market

The Classification of Businesses

•Size and Scope•Purpose•Industry and Markets

Size and Scope

•Large vs. Small

More than 1000 employees

Less than 100 employees    -about 95% are classified as small businesses    -employ > 1/2 of the private sector workforce 

Size & Scope

•Domestic vs. Global

Domestic business- Define it!

Global business- Define it

Purpose

•For-profit vs. Nonprofit Organizations

For-profit business-Define it

Nonprofit organization-Define it

Purpose

•Public vs. Private

public sector-Define it....Give some examples

-purchase 1/3 of all goods and services sold in the U.S. each year.

private sector-Define it...Give some examples

Industry and Markets

Businesses are classified according to:• the industry they represent• the products they sell• the markets they target

NAICS-What does this stand for?

Industry-consists of a group of establishments primarily engaged in producing or handling the same product or group of products or in rendering the same services.

Industry and Markets

Businesses are classified according to:• the industry they represent• the products they sell• the markets they target

Consumer, Industrial, and Service Markets

The relationship between consumer and industrial markets can best be explained by the concept ofderived demand.

What is derived demand?

Derived demand in the industrial market is based on, (or "derived from") the demand for consumer goods and services

Types of businesses in the industrial market

•extractors (agriculture, mining, fishing, forestry)•construction (homes, commercial buildings)•manufacturing (goods produced and sold to others)•wholesalers-obtain goods from manufacturers and

resell them to industrial users, other wholesalers, and retailers

•retailers-buy goods from wholesalers or directly from manufacturers and resell them to the consumer

•service related (intangible products-insurance, housekeeping, accounting, marketing, doctors, dentists, lawyers

The Functions of Business

All of these things functions must be looked at as part of a SWOT analysis

production-the process of creating, expanding, manufacturing, or improving on goods and services

What are some different examples of production?

The Functions of Business

All of these things functions must be looked at as part of a SWOT analysis

production-the process of creating, expanding, manufacturing, or improving on goods and services

What are some different examples of production?

• Songwriter creates new music• Farmer grows crops• Ford manufactures new cars• Software developers write new programs

The Functions of Business

All of these things functions must be looked at as part of a SWOT analysis

production-the process of creating, expanding, manufacturing, or improving on goods and services

What is looked at in evaluating this function?

The Functions of Business

production-the process of creating, expanding, manufacturing, or improving on goods and services

What is looked at in evaluating this function?

• Innovation• Speed to market• Efficiency• Level of success with products

The Functions of Business

All of these things functions must be looked at as part of a SWOT analysis

procurement-involves buying and reselling goods that have already been produced

SWOT Analysis, Wholesalers, and Retailers-evaluating wholesalers and retailers on their merchandising ability.

What are the five "rights" of merchandising?

Marketing-all the activities that take place from the time a product leaves the manufacturer until it reaches the final consumer

The role of marketing activities-•research•pricing •promoting•selling

Evaluate the four Ps in relation to your target market, company objectives, and sales performance.

management- the process of achieving company goals by effective use of resources through planning, organizing, and controlling

Explain:

planning

organizing

controlling

management- the process of achieving company goals by effective use of resources through planning, organizing, and controlling

A SWOT Analysis of this function focuseson the evaluation of the personnel

who run the company.

Finance and Accounting

Finance-the function of business that involves money management 

Accounting-the discipline that keeps track of a company's financial situation

Important Documents to Analyze•Balance sheet•P & L •Cash flow statement