EM - Basic Economic Concepts [LESSON]

Basic Economic Concepts

There are a few basic economic concepts you need to know before continuing this unit. Review the information below about goods and services, free enterprise and its components: competition, risk, and profit.

Goods and Services

• Goods - Products, such as food, toys, clothing, and cars that are tangible
• Services -  Products, such as a bank loan, dry cleaning, lawn service or car repair that are intangible

Free Enterprise

• A free-enterprise system is based on private ownership as the means of production
• Free-market systems operate in capitalist economies
• The people have the right to make economic choices
• What products they want to buy
• They can choose to own property
• They can start businesses & compete with others

Competition

• Rivalry in business, as for customers or markets
• Forces companies to become efficient while keeping prices down and quality up.
• Competition can be between price versus non-price factors
• Price Competition - Assumes that all things being equal the customer will buy lowest priced product.
• Non-Price Competition - looks at all the benefits of a company. For instance, quality, service, location, and reputation. A customer may pay more for a pair of shoes if the quality is better or if the store is located close to their home.

Comparison Perfect Competition and Monopoly
PERFECT COMPETION	Similarities	MONOPOLY
Perfectly competitive firms produce homogeneous products.	PRODUCTS	Under pure monopoly there is only one firm producing a single product
Perfect competition aims to maximize profits	AIM	Monopoly aims to maximize profits
	Differences
There are many firms in perfect competition	NUMBER OF FIRMS	There is only one firm under monopoly
Because there are so many firms operating under perfect competition, they are insignificant that they cannot influence the price.	INFLUENCE ON MARKET	The monopolist being the only firm in the marketplace exerts complete control over the market.
There is freedom of entry and exit under perfect competition.	ENTRY AND EXIT	Under monopoly there is no freedom of entry.
There is widespread knowledge of profits under perfect competition.	PROFITS	Since there is only one firm in monopoly there is no necessity to disclose profits.
Because of the intensity of competition between perfectly competitive firms they earn normal profit.	TYPES OF PROFIT	Because there is no competition within monopoly, the firm is able to sell its product at a high price enabling it to earn supernormal profit.

Business Risk

• Potential for loss or failure
• As the potential for earnings gets greater, so does the risk

Profit

• Money left after all expenses are paid
• The main incentive of a free enterprise system

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