Free Enterprise SystemFree Enterprise SystemIn Introduction to Economics

Philosophy that our nation’s founders believe that individuals should have the freedom of choice.

In theory, the free enterprise system encourages individuals to start and operate their own businesses without government involvement.

CompetitionCompetitionStruggle between companies for customers that is both healthy and vital to out free enterprise system.

Price CompetitionFocuses on the sale price of a product.

Non-price CompetitionBusinesses choose to compete on the basis

of factors that are not related to price.

Competition, cont.Competition, cont.Direct CompetitionProduct or brand which competes in the same product category.

Indirect CompetitionA product that is in a different category altogether but which is seen as an alternative purchase choice.

Competition, cont.Competition, cont.

MonopolyExclusive control over a product or the means of producing it.

Are Monopolies Fair?Are Monopolies Fair?Risk

The potential for loss or failure.

ProfitThe money earned from conducting business after al costs and expenses have been paid.

Economic Benefits of Successful Firms Economic Benefits of Successful Firms Vs.Vs.

Economic Cost of Unprofitable FirmsEconomic Cost of Unprofitable Firms

The Role of Government:

1. Provide general services (fire, police, education)

2. Support business (SBA, loans for businesses)

3. Regulates business (worker, business protection)

4. Competes with small business (TVA, Mail, Amtrack)

The Role of Consumers:

1. Pick the winners

2. Determine how much demand

3. Keep it a customer oriented society

System by which a nation decides how to use its resources to produce and distribute goods and services.

3 Basic Economic Questions: What is produced?How is it produced?

For whom is it produced for?

Economic SystemsEconomic Systems

Market EconomyNo government involvement in economic decisions.

Command EconomyThe government answers the economic questions.

What countries economies are a pure market or pure command?

Economic Systems, cont.Economic Systems, cont.By answering the 3 basic questions, you will fit into 1 of 2 categories.

Mixed EconomiesMixed EconomiesCapitalism

The economic market system characterized by private ownership of businesses and marketplace competition.

SocialistIncreased amount of government involvement in order to reduce the differences between rich and poor.

CommunistTotalitarian--that means that the government runs everything.

WHO DOES THIS SOUND LIKE?

GERMANY, FRANCE, AUSTRALIA

CUBA, NORTH KOREA

Mixed Economy, cont.Mixed Economy, cont.

PrivatizationProcess of selling government-owned business to private individuals.

CapitalThe money needed to start and operate a business, which also includes the goods used in the production process.

LaborAll the people who work in the economy.

LandRefers to everything in its natural state.

EntrepreneurhsipRefers to the skills of the people who are willing to risk their time and money to run a business.

Factors of ProductionFactors of ProductionEconomist term for resources.

Production, cont.Infrastructure

The physical development of a country, which includes the roads, ports, sanitation facilities, and utilities.

ResourcesAll the things used in producing goods and services.

Choices

Scarcity

What How For Whom

UnlimitedUnlimitedNeeds & WantsNeeds & Wants

LimitedLimitedResourcesResources

ScarcityThe difference between needs and wants, and

available resources.

Economics BasicsEconomics BasicsDemand

Refers to consumer willingness and ability to buy products.

SupplyThe amount of goods producers are willing to make and sell.

EquilibriumExists when the amount of product supplied is equal to amount of product demanded.

Economics Basics, cont.Economics Basics, cont.Surplus

Occurs when supply exceeds demand.

ShortagesOccurs when demand exceeds the supply.

Demand scheduleDemand curve

PriceQuantity

Demanded1.25$ 81.00$ 140.75$ 200.50$ 260.25$ 32

$-

$0.25

$0.50

$0.75

$1.00

$1.25

2 8 14 20 26 32Quantity

Pri

ce

D

The Demand Schedule and Demand “Curve” for MP3 songs.

The demand curve slopes downward

because of the law of demand

The demand curve slopes downward

because of the law of demand

The prices of related goods: Substitutes and Complements

• Substitutes are goods that are related in such a way that in increase in the price of one good leads to an increase in demand for the other good

• Complements are goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other

The Supply Schedule and Supply “Curve” for MP3s

The supply curve slopes upward because of the law of supply

The supply curve slopes upward because of the law of supply

Supply schedule

PriceQuantitySupplied

1.25$ 281.00$ 240.75$ 200.50$ 160.25$ 12

Supply curve

$-

$0.25

$0.50

$0.75

$1.00

$1.25

8 12 16 20 24 28Quantity

Pri

ce

S

Changes in Supply

Changes in supply can be caused by changes in, Technology The prices of resources used

in production (input prices = wages, interest, rent)

Producer expectations The number of producers

Market equilibrium

In equilibrium, the plans of

buyers match the plans of sellers

In equilibrium, the plans of

buyers match the plans of sellers

Q

P

SD

Qe

Pe

a.k.a. the market clearing price

“a snap shot”

Market Schedules and Equilibrium for MP3s

Market schedules

PriceQuantitySupplied

QuantityDemanded

Surplus orShortage Price

1.25$ 28 8 Surplus of 20 Fall1.00$ 24 14 Surplus of 10 Fall0.75$ 20 20 Equilibrium Remain the same0.50$ 16 26 Shortage of 10 Rise0.25$ 12 32 Shortage of 20 Rise

Business CycleBusiness CycleReoccurring movement or changes in the economy that goes through four stages:

ProsperityPeriod of economic growth.

RecessionPeriod of economic slowdown.

DepressionPeriod of prolonged and deep recession.

RecoveryPeriod of renewed economic growth.

ProductivityProductivityThe output per worker hour.

Gross Domestic Product (GDP)The measure of the goods and service produced using labor and property located in this country.

Gross National Product (GNP)Everything produced by U.S. citizens here or abroad.

Standard of LivingMeasurement of the amount of goods and services that a nation’s people have.

InflationInflationRising Prices.

Consumer Price Index (CPI)Measures the change in price over a time of some 400 specific goods and services used by the average urban household.