How the Private Enterprise System Works

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How the Private Enterprise System Works

Economists use the term factors of productionwhen they refer to the four basic inputs of natural resources, capital, human resources and entrepreneurship. Not all firms require the same combination of these factors, but each business uses a unique blend of the four inputs:

1. Natural resources refer to everything useful as a productive input in its natural state, including agricultural land, building sites, forests, and mineral deposits.

2. Capital, the key resource of technology, tools, information, and physical facilities. Technology is a broad term that refers to such machinery and equipment as a production machinery, telecommunications, and basic inventions. Information, frequently improved by technological innovations, is also a critical factor, since both management and operative employees require accurate, timely information in order to perform their assigned tasks effectively. Money is necessary to acquire, maintain and upgrade a firm’s capital.

3. Human resources, the third factor of production, include the millions of managers and other employees of the world business.

4.The final production factor is entrepreneurship or taking the risks involved in creating and operating a business. The entrepreneur is a risk taker in private enterprise system. This person identifies a potentially profitable opportunity and then devises a plan and forms an organization to achieve that goal. When they are successful in their efforts, entrepreneurs receive the factor payment of profit. Successful entrepreneurs also receive satisfaction of a non-monetary nature. The entrepreneurial spirit lies at the heart of the private enterprise system. If no one took risk, there would be no successful businesses, and the current economic system could not exist.

How Businesses Compete

Four basic degrees of competition exist in a private enterprise system: pure competition, monopolistic competition, oligopoly, and monopoly.

Pure competitioninvolves many firms in an industry close enough in size that no single company can influence the prices charged in the marketplace. Pure competition involves similar products that cannot be differentiated from those of competitors. In a purely competitive market, it is relatively easy for a firm to enter or to leave that market. Agriculture is probably the closest example of pure competition (although government price-support programs make it somewhat less competitive) and wheat is an example of a product that is similar from farm to farm.

Monopolistic competitionis a market situation where firms are able to differentiate their products from those of competitors. You may see monopolistic competition operating when you watch advertisements that try to persuade you to choose one brand over another. M.C. gives a firm some power over the price it charges. Think about retail stores, where prices can vary among different brands of aspirin, toothpaste or gasoline.

Oligopolyis a market in which there are few sellers. In some oligopolies, such as steel, the products are similar; in the others, such as automobiles, they are different. The huge investment required to enter the market tends to discourage the new competitors. But the primary difference between oligopoly and the previously mentioned types of competition is that the limited number of sellers gives the oligopolist more control over price. In an oligopoly, the prices of competitive products are usually quit similar because substantial price competition would lessen every firm’s profits. Price cuts by one firm in the industry typically are met by all competitors.

Monopolyis a market situation in which there are no competitors. Since the Sherman and Clayton acts prohibit attempts to monopolize markets, nearly all the monopolies in the United States are government-regulated monopolies, such as public utilities. Firms selling electricity and natural gas are regulated by state agencies in the United States. These agencies administer many aspects of the regulated monopolies, including pricing and profits. In a pure monopoly, a firm would have substantial control over pricing, but in a regulated monopoly, pricing is subject to rules imposed by the regulators. There are few directly competitive products in a regulated monopoly, and entry into the industry is restricted by the government.



Characteristics Pure Competition Monopolistic Competition Oligopoly Monopoly
Number of competitors Ease to entry into industry by new firm Similarity of goods or services offered by competing firms Control over price by individual firms   Many   Easy   Similar   None Few to many   Somewhat difficult Different   Some Few   Difficult   Can be similar or different Some No direct competitors   Regulated by government No directly competing goods and services Considerable in a pure monopoly; little regulated monopoly

(Based on:Kurtz D., Boone L., Boone and Kurtz Business)


III. Here is the transcript of radio broadcast which illustrates the spirit of entrepreneurship as one of the main resources of the private enterprise system. Translate this text and be ready for its discussion on the basis of active vocabulary, key terms quiz, review and discussion questions.

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