Market-Oriented Economic

Systems
 Basic Principles

• Our founding fathers believed that

individuals should have the freedom of
choice
– They defined rights that are central to our
society
• Freedom to elect people to represent us
• Freedom to make decisions about where we work
• Workers are free to organize and negotiate
• Free to invest our money in banks or businesses
• The basis of the free enterprise system is the
right to own personal property
• A free enterprise system encourages individuals
to start and operate their own business in a
competitive system without government
involvement
• The marketplace determines prices through the
interaction of supply and demand
• The free enterprise system we have today in the
U.S. is modified because the government does
intervene in business on a limited basis
 Freedom of Ownership
• Individuals are free to own personal
property eg. Natural resources (oil, land),
homes, cars
• You can buy anything you want as long as
it is not prohibited by law
• You can also do what you want with your
property in a free enterprise system (give it
away, lease it, sell it, or use it yourself)
 Business Ownership
• Entrepreneurs are people that start their
own business
• Others may not want to be involved in
running a business, but they support
business by investing their money in parts
or shares of business
• These shares are called stocks and the
invertors are called stockholders
• Company stocks are bought and sold daily
 Intellectual Property Rights
• Intellectual property rights are protected in a
free enterprise system
• Patents, trademarks, copyrights, and trade
secrets are intellectual property rights
a. patent – you alone own the exclusive rights to
that item or idea for up to 20 years . Anyone who
wanted to manufacture your product would have
to pay you for its use through a licensing
agreement
• Trademark – a word, name, symbol,
sound, or color that identifies a good or
service and cannot be used by anyone but
the owner
– unlike a patent, a trademark can be renewed
forever, if it is used by a business
• Copyright – involves anything that is
authored by an individual, such as writings
(books, magazine articles, etc.), music and
artwork.
– it gives the author the exclusive right to
reproduce or sell thye work
– a copyright is usually valid for the life of the
author plus 70 years

A trade secret is information that a company

keeps and protects for its use only, but it is
not patented, ie. Coca-cola’s formula
 Competition
• Struggle for customers between businesses
is called competition
– essential part of a free enterprise system
– competition forces businesses to produce better
quality goods and services at reasonable prices
– competition results in a wider selection of
products from which to choose
 Two ways a business competes:
Price Competition
or
Nonprice Competition
• Price competition focuses on the sale price
of a product
– The assumption is that all things being equal,
consumers will buy the products that are lower in
price
– Eg. Wal-Mart’s “Always Low Prices. Always”
slogan stresses price as its primary focus of its
competitive advantage as does Southwest
Airlines focus on low fares
• Nonprice competition – businesses choose
to compete on the basis of factors that are
not related to price
– quality of products, service, financing, business
location, and reputation
– some nonprice competitors stress the
qualifications or expertise of their personnel
– businesses that use nonprice competition may
charge more for products than their competitors
– nonprice competiton in advertising stress a
company’s reliability, tradition, superior know-
how, and special services
– dot-com companies eg. Free shipping/same day
 Monopolies
• When there is no competition and one firm
contols the market for a given product a
monopoly exists
– Monopoly is exclusive control over a product
or the means of producing it
– Monopolies are not permitted in a free
enterprise system
– The U.S. government has allowed a few
monopolies to exist, mainly in industries
where it would be wasteful to have more than
one firm
• One of the most publicized cases in recent
history involved Microsoft
– A federal judge declared Microsoft’s Windows
operating system was a monopoly, its
technology dominance was said to have
stifled innovation and hurt consumers
– Also, currently utility companies are being
deregulated allowing consumers to choose
their own electric and natural gas suppliers
 Risk
• along with the benefits of competition and
private ownership of property, businesses
also face risk
• business risk is the potential for loss or
failure
• as potential earnings get greater so does
the risk
• One out of every three businesses in the
U.S. fails after one year of operation
• also, up to 85% of new products fail in the
first year
• Principles of the free enterprise system
– Property ownership
– Competition
– Risk
– Profit motive
 Supply and Demand
• In a market economy supply and demand
determine the prices and quantities of goods and
services produced
– Supply is the amount of goods producers are willing
to make and sell (page 106)
– Demand refers to consumer willingness and ability to
buy products
– When supply and demand interact in the marketplace,
conditions of surplus, shortage, or equilibrium are
created. These conditions determine whether prices
will go down, go up,or stay the same
• Economic cost of unprofitable firms
• Economic benefits of successful firms
– Read page 106