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Business: Any person, group, company, whose purpose is to produce or services is a


We often think of mammoth companies like General Motors as representing the business
element in our society. Bu the small grocery store, & the beauty parlor down the street
are also businesses.

There is also a tendency to let references made to business bring to mind only those
enterprises owned by individuals, partners, or stockholders. If this were true, we could
not regard the U.S. postal service, or Los Angeles Airport as businesses.

Neither size nor kind of ownership determines what is a business. The real distinguish
feature is the production and sale of goods and services.

Doesnt a city fire dept. produce protection services which are bought by taxpayers?
School produce educational services.

Business Under Private Ownership: The Capitalistic System: The distinguish feature of
American business throughout history has been private ownership.


Most of the businesses are privately owned businesses. (over 80% of goods came from)

The Function of All Economic Systems: Barter system---->Specialization---->Each

individual then depends increasingly on others for most of his needs and wants.

Every country has to have some way of providing the goods and services its people

In some countries a system of capitalism Free Enterprise has developed.

* This based upon individual initiative rather than Govt. action.
* It is often referred to as Laissez Faire (French for let be or allow to act)
* This system promotes and encourages private ownership of property as the means by
which individuals produce or distribute goods and services.
* It carries with govt. stay out attitude.
* It rewards with profits the individuals who can successfully establish and operate an
organization meeting economic needs.
Many people dont accept capitalism as the best economic system.
* They feel it has defects which outweigh its advantages.
* These critics of capitalism oppose the principle of private enterprise.
* Rather, they look to the govt. to control economy and to make the major decisions.
* We shall refer to this as controlled enterprise, or Socialism.
The basic nature of the economic system is the same under capitalism and socialism,
but, of course the role of individuals and governments are quite different.


of owners to receive the profits a business makes (While assuming the risk of loss);
to start up any lawful business and to liquidate it;
to invest or to refrain from investing;
to make contracts;
to buy from and sell to whomever one pleases; and
to set whatever prices one wishes and can get.

Historically the rights attached to ownership have also been accompanied by a number of
Political freedoms. (the right to free speech, fair trail, religious freedom, vote for political

However, in countries in which rights of private ownership have been largely abandoned,
political freedom have also tended to disappear.

Once people have minimum requirements of life, such as food, clothing, shelter, they begin to
want to buy and consume freely.

History and Capitalism: In America, as well as in most of Europe, people believed that free men
competing with each other to produce what the public wanted, goaded by the desire to make
profit, and controlled by the lash of competing to keep prices low, would create the most vigorous
and successful economic system possible.

How Economic Systems Differ: It is not What is being done? It is how to go about it.


Businesses Are Economic Enterprises: Those operations that produce and sell a product
or service to people who want and can buy them.

This concept of privately owned business, the heart of capitalistic system, means not only that
business is owned directly or indirectly by individuals. Traditionally it has also involved certain

To be sure, It was recognized that many things people wanted could not be produced and
marketed by private businessmen. (National defense, construction of canals, waterways etc.)

But the dominant idea on which private capitalism thrived in the United States was that
government intervention should be minimized.

Success of Private Capitalism in America: This system has been successful in the United

U.S. has been indisputably the leading industrial nation of the world.
* With less than 6% of worlds population, it has over 40% of the worlds wealth and production.
* The Soviet Union, on the other hand, has one-fifth more population than the U.S. but produces
less than one-third the output of the U.S.

The U.S. achievement of a high material standard of living cannot be accounted for by natural
resources alone.
* Other countries such as Brazil, have vast natural resources.
* Other countries also have large educated populations.
* Many competent observers have claimed that U.S. prosperity is the result of a long tradition of
private ownership plus drive supplied by legally enforced competition.

Defects of Private Capitalism in America: In stressing the good points of capitalism, we

shouldnt overlook its defects.

In 19th century, the factory system was accompanied by intolerable working conditions, long
hours, low pay, the exploitation of women and children.
* Most of these abuses have since been eliminated by the efforts of govt.

In 19th century, some capitalists exploited their positions of power to develop monopolistic

But laws passed half a century ago have now made such abuses of power very difficult.

While cases of price-fixing, misleading advertising, and other illegal and unethical behavior still
occur, they are relatively few.

It is true that economic growth has brought with it many social problems.

Poverty still exists in the midst of unprecedented wealth.

Pollution of water, land, and air has become a major problem.

Moreover, so long as a country has the material resources, political freedoms, and a responsive
elected government, there is promise that most major social problems can be solved.

Mixed System: Many countries have systems of mixed public and private ownership of business.

In the U.S., as in all so-called private capitalistic countries, many business and other facilities are
publicly owned
The so-called communist countries have, for their part, found it necessary to allow varying degrees
of private ownership.

The U.S. government has increasingly controlled private business by a multitude of regulations, as
well as by various aids and subsidies.

Government agencies, as the nations largest single buyers of goods and services, exercise great
power over companies that sell to them.

Private Ownership Versus Public Ownership: As we have already seen, neither private ownership
nor public ownership is perfect for all circumstances.
* Every countrys system is to some extent mixed.

Privately owned capitalist system:

* A privately owned capitalist system cannot guarantee full employment;
* It cannot guarantee the elimination of poverty;
* It must be regulated to prevent the sharp practices
* It may produce air and water pollution;

Business Under Public Ownership: Socialism and Communism: Some societies believe that
business operates best when it is publicly owned.

This view is held in Soviet Union, China, Egypt and other countries.
* But even in these countries some small-scale private ownership is allowed.

A national system of public ownership is almost invariably accompanied by central government

planning of what will be produced and sold.

Even in capitalistic countries, public ownership has been useful in accomplishing certain
* In the U.S. one might mention, among other things, the Alaska Railroad, irrigation and power
dams, highways and waterways, Army ordnance plants, national parks.

Public planning and ownership are most effective when needs are clear.

It is impossible for any central planner to know the tastes and desires of a nation of consumers
and to provide the right thing in the right amounts in the right places.

Many Russians have come to believe that even under socialism it is necessary to allow
businesses to make profits by furnishing what is wanted.

It is a system of public ownership in which the government is controlled by the few.

Those in control have imposed many restrictions on individual freedoms: on freedom of

expression, on the freedom to move from one place to another, and on economic freedom.
*Many things people want, and have the money to buy, are either unavailable or strictly

Both capitalism and socialism have their defects.

Government owned business system:

* On the other hand, a government owned business system may stifle initiative and innovation.
* It may not be quickly responsive to public desires for products and services.
* And it may severely limit the freedom of people to work where they wish, buy what they want,
and live as they wish.

As all thing in life, political-economic systems are not perfect or wholly good or bad.
* Life is a matter of tradeoffs (the giving up of something to get others).

In the U.S. most people believe that mixed system of private and government ownership is better
than any other alternative.
* Americans like the opportunities for greater freedom in buying and living.
* Americans prefer a system that give them the opportunity to own the property, to go into own
business, to make profits.
* They do not believe it is perfect, but they prefer its combination of virtues defects of those of
other systems.

The Role of Competition: A successful private enterprise system depends on the maintenance of
effective and responsible competition.

Without competition, consumers would be at the mercy of greedy sellers.

* And workmen would be at the mercy of unscrupulous employers.
* Without competition between customers, business would be at the mercy of those to whom they
* Without competition b/w workers for jobs, employers would be at the mercy of their employees.

To meet the goals of society, however, competition must be effective and responsive.

Some Businesses Are Monopolies: When the is only one seller in an industry, it is said to have a

Effective Competition: For competition to be effective, suppliers of goods and services must be in
open rivalry for customers.

One sellers loss must be another sellers gain.

Sometimes competition takes the form of rivalry over price.

Sometimes competition is based on real or imagined differences in products or services, as in the

airlines, cosmetics, and packaged foods industries.
* The basic price of a ticket of one airline is same as on another, but the lines compete in other
ways, in the services they offer, or in their scheduling.

In some cases complete competition will not work, as with telephone companies, electric utilities.
* In these cases, competition would only result in higher costs and poorer service to the public.
* In industries such as these it has been the practice to allow single-company operationthat is,
a monopoly.
* Government agencies then step in to regulate prices, quality of service, and freedom to enter,
and abandon a business.

Responsible competition: Companies that use competition with a view to destroying others or to
do discriminating unfairly against rivals have been carefully controlled.

Unfair methods of competition, such as dishonest advertising, failure to be truthful in product

claims, and many others, are investigated by various government commissions.

Many other steps have been taken to enforce a degree of fairness and social responsibility in

Competition can also take the form of rivalry among different products.
* The dairy industries try to get people to consume their proteins in cheese or milk rather than
* Cooking oil and ghee
Psychologist believe that competitiveness is a basic part of human nature.
* This doesnt mean that it is always good.
* Competitiveness may take the form of cheating, and even immoral behavior.
* But it also results in accomplishment and superiority.

Competition underlies the development of new products and new methods, the founding of new
businesses, the lowering of costs, and the whole movement toward a better way of life.

Most of our material improvementshomes, automobiles, transportation services, entertainment,

television sets, new life-saving drugs, and even better collegeshave come about largely
because of the desire to beat rivals.

A monopolist canif it is not controlledcharge buyers whatever it wishes.

* No monopolist of beef can force us to buy beef rather than chicken.

Sometimes a buyer may have a monopoly too.

* Where there is only one buyer for the product of a business, this situation is referred to by
economists as a monopsony.
* But the power of the monopsonist is not absolute either, since the seller may well decide that he
would rather go without an order than sell at a loss.

The best-known instances of monopolistic businesses in this country are public utilitiescompanies
producing and selling electricity, water, gas, telephone service, street railways and bus services, and
sometimes other items.

Because of their importance and the fact that they are monopolies, public utilities are more
extensively regulated than other businesses.

Monopoly Elements in Competitive Businesses: The most important of these are oligopoly,
product differentiation, and trademarks, copyrights, and patent monopolies.
Oligopolies and Presumption of Monopolistic Behavior: Oligopoly (from Greek, meaning few

Oligopolies exists among the automobile manufacturers, the airlines, and in many other industries.

Because of the fact that one sellers competitive action will be noted and felt by others, it is easy to
assume that members of an oligopoly do not really compete. (Live-and-let-live policy)
* This will naturally depend on the ease or difficulty with which new suppliers can come into a

Competition May Be Varied: Competition may be between the sellers of the same product, who
seek to win customers from each others.
*Newspapers, magazines, and television shows are full of advertisement design to convince buyers
of the superiority of one companys products or services.

The monopoly may be privately or publicly owned.

Price competition is limited among oligopolies does not rule out strong competition for customers
thorough advertising, special customer services, product changes, and other forms of nonprice

Monopolistic Competition: Product Differentiation:

Real Difference: If a soap manufacturer puts more lanolin into his soap and persuades people that his
product is therefore superior and unique, he gains an advantage.
Imagined Difference: If he leads people to think his product substantially unique by means of effective
advertising and the establishment of a known brand name.

The purpose of product differentiation is to make a buyer believe that a given product is superior to
others he might buy. To the extent the seller is successful in this, a monopoly-type position is

Trademarks, Copyrights, and Patent Monopolies: Govt. generally permits seller register
trademarks and copyrights and patent new products, and services so that these became their property
and cannot be used by others without their permission.

This is done to protect an individuals investment and to prevent other from

making money out of his work.
* These devices represent monopolistic elements.