Question

1. What are the four conditions that must exist for the free enterprise system to exist?
2. What are the implications of the relationship between supply and demand?

Answer 1

1. Profit Motive and Free Enterprise- One key motivator drives free enterprise systems above all others: the ability to realize a profit. Benefit is characterized as the difference between total price and total cost. In other words, profit is the financial benefit accepted by a seller selling an item for more than the seller paid. Free market structures are largely focused on the willingness of purchasers and sellers to negotiate price deals and other conditions for the selling of products and services. In general, however, sellers are bent on increasing their income to create more money. This aspect of free enterprise systems is much the same as in capitalist economies, which are likewise focused on the creation of maximum possible wealth

Private Property Rights- Free competition requires acknowledgment of everyone participating in the market as having complete personal control of their own land. Private property rights are what allow free exchange through selling of that land. There are many forms of economic structures in which property ownership is extended not to individuals but to classes, societies or the government. When individuals enter the free business market, however, they carry with them the freedom to sell, trade, or dispose of their property in whatever way they wish.

Equal Rights for All Market Participants- All market participants in a free enterprise system enjoy equal rights, in addition to the right to control one's own property. If a market is to be truly free, purchasers and sellers involved in that market must be on a level, equal footing. Recognition of fair opportunities for consumers in the free market is what enables genuine market-driven competition.

Importance of Competition- Competition is key to creating a healthy free market framework. Those businesses that excel in a free market economy are the ones the market has chosen to reward. This usually means that certain successful businesses have delivered a superior product or service, or they have met a business need a little more deeply than their competition. The competition cycle is what drives innovation, superior product production and greater creativity in the system as a whole.

2. When demand is unchanged, there is an inverse relationship between the availability of goods and services and their costs. If supply for goods and services is increased while demand stays the same, prices continue to fall to a lower equilibrium price and a higher equilibrium sum of goods and services. If the supply of goods and services decreases while the demand stays the same, prices continue to increase to a higher equilibrium price and a lower amount of goods and services.

Increased prices usually lead to lower demand, and rises in production generally result in increased supply. Nevertheless, the supply of different goods responds differently to demand, with demand from some goods becoming less price reactive than others. Economists define this resilience as the price elasticity of demand; so-called price-sensitive goods. Inelastic pricing indicates a low price control over demand. The demand rule still applies, but pricing is less strong and thus has a weaker effect on supply.