Understanding Free Enterprise: Production, Prices, and Goods in the US Economy, Study notes of Business

Download Understanding Free Enterprise: Production, Prices, and Goods in the US Economy and more Study notes Business in PDF only on Docsity! THE FREE ENTERPRISE SYSTEM Free Enterprise in the United States Deciding What to Produce Determining Prices Developing Goods and Services Free Enterprise in the United States The U.S. economic system is largely capitalistic. Another name for capitalism is free enterprise. Free enterprise is based on a principle known as the free market system. In economics, a market is business carried on between buyers and sellers. In the free market system, prices help decide what, how, and for whom to produce. Self-interest, profits, competition, and the right to own private property are the key factors in free enterprise and the free market system. Self-interest is the single, most powerful force in the U.S. economy. Consumers, or the people who buy goods and services, shop for the best possible goods at the lowest prices. Producers look for ways to make the largest possible profits. Their search often leads them to invent better products and to develop the most efficient ways to produce them. High profits may encourage producers to expand their businesses. That growth will make more goods available to consumers and provide more jobs for workers. Competition has a similar effect. Because producers must compete with one another, each business tries to keep the quality of its goods high and prices low so that consumers will choose its products over others on the market. Consumers, in turn, get a broad choice of products to buy. The U.S. economic system also protects the right to own private property. Private property includes factories and stores as well as people’s homes. Under free enterprise, the U.S. government makes no central plan for the nation’s economy as the Communist government in the former Soviet Union once did. However, the government does make laws and regulations that limit the freedoms of private business owners. The minimum wage, for example, is a government regulation. The government also produces certain kinds of goods and services. The postal system, local schools, and city bus lines are all government sponsored. The purpose of these government regulations and services is to keep the country running more smoothly. Back to Top Deciding What To Produce Most people have unlimited wants, but everybody has a limited amount of money. A producer cannot decide what to produce simply on the basis of what people want; he or she must take into account whether people will have the money to pay for the product. For instance, it would be foolish for a businessperson to try to produce and sell expensive sports cars in a poor country. Although people in that country might want those cars, most of them would not have the money to buy them. Moreover, the few people who could afford such cars might prefer to spend their money on something else. Producers, therefore, have to take into account not only whether consumers will want their product, but also whether potential consumers will be able and willing to pay for it. The desire for a product, plus the ability and willingness to pay for it, is called the demand for that product. Demand usually leads to production. But before a businessperson decides to go into production to meet a certain demand, he or she must consider one more question: Will consumers be willing to pay more for the product than it costs the businessperson to produce it? Suppose, for instance, that a company is planning to manufacture shirts. It will cost the company $15 to make each shirt. Customers, however, are unwilling to pay more than $15 for the shirt the company offers them. In this case, if the owners of the company are smart, they will get into some other product line because they will not make a profit selling shirts. The previous example illustrates that the decisions about what, how, and for whom to produce are closely related to the search for profits. What will successful business people or companies produce? They will produce those goods and services that can give them profits. How will they produce? They will use the most efficient methods in order to make quality products, keep production costs low, and gain the largest profits. For whom will they produce? They will produce only for people who want their products and are willing and able to spend money on them. Back to Top Determining Prices In some countries, prices are set by the government. In a free enterprise system, however, prices are determined in the market. A market exists when buyers, who have money and want to buy goods and services, are in contact with sellers, who offer goods and services and want money. The price of a given product is established both by the buyers, who want to buy at the lowest possible price, and the sellers, who want to sell at the highest possible price. Economists say that prices are determined by the relationship between supply and demand. Supply is the quantity of a good or service that a seller is willing to sell at a certain price. The law of supply says that if the price of a product is high, the producers will be willing to sell more of it. If the price is low, they will want to sell less of it Economists picture supply by using a line graph. Prices on a supply graph are shown on the vertical axis, and quantities are shown on the horizontal axis. The graph on the left is an example of a supply graph for peaches. The supply curve in the graph slopes upward. This shows that the quantity of peaches offered for sale increases as the price per pound increases. At a price of $0.50 per pound, the seller would be willing to sell 10 pounds. At a price of $1.00 per pound, he or she would be willing to sell 40 pounds, and so on.