Private Enterprise System - Assignment Example

? Private Enterprise System A private enterprise system is one where firms are rewarded for identifying and serving the needs and demands of the market. Capitalism is another name given to a private enterprise system. There is minimal government intervention in this type of system. The result of this is that proficient firms, able to satisfy consumers, have access to the necessary resources needed to produce goods and services and earn a profit (Kurtz & Boone 2011). In a private enterprise system there is competition between the producers in the marketplace and factors of production (resources) are privately owned. The competitive nature of the economy, due to the capitalist system, makes it easier for consumers and firms to buy and sell goods and services freely. In a private enterprise system in its purest form all factors of production are privately owned and there is no intention from the government to set market prices or intervene in the economy (Gitman & McDaniel 2007). Due to the little intervention by the government market forces dominate the economy and the three basic questions in economics: 1) what to produce? 2) how to produce? and 3) for whom to produce? are determined by the market mechanisms of demand and supply. 1. What goods and services to produce: it is the people who decide the mix of goods and services that should be produced and sold in the economy. The people demand those goods and services that they either need or want. Their needs and wants are based on the amount of income they have or wealth they possess to buy the goods and services. Firms then produce and supply the goods and services that are demanded by the customers in order to maximize their profits. 2. How to produce the goods and services: as there are limited resources available to an economy, producers aim to use minimum resources to maximize output and profits. As a result firms use the most effective, efficient and least costly factors of productions to produce the goods and services desired by the consumers in the economy. 3. For whom to produce: as there are only a limited number of resources available hence only a limited amount of goods and services can be produced. People’s income is the major determinant regarding who gets the produced goods and services. Although firms produce the goods and services demanded by the economy, people with more income and more money at their disposal will dominate and be able to buy whatever they desire. Hence as can be seen the basic economic questions are answered in a private enterprise system by the decisions of producers, consumers and the market forces of demand and supply. There are four economic rights in a private enterprise system. The fundamental right on which the whole capitalist system stands is the right to own private property. As the private enterprise system states that resources are privately owned, people have the right to buy, sell, own, use and transfer property. Some forms of property include land, machinery, building, equipment and private possessions. People won’t be able to sell goods and services if they are not allowed the right to own as they will not be able to transfer this right to others through an agreement. The second right that exists in a private enterprise system is that the business owners have the right to keep profits from their business activities after taxes have been paid. Profit is the reward for the business owners as he is the one who takes the risk of investing his privately owned resources in the business hence any income generated by the owner in excess of his costs becomes his profit which he is entitled to keep. Another important right is the right of freedom of choice. People in the private enterprise economy are free to choose their own job, find alternate jobs if they are not satisfied with the current, become part of labor unions, negotiate their wage with the employer, choose from a diverse range of goods and service or choose to set up their own business. As can be highlighted from these examples people have almost absolute freedom while choosing to make economic decisions. Although this freedom can be taken for granted by many, we need to understand that in other types of economies such as communism people do not have a lot of choice as there is strict government planning. People may be forced to work in industries to meet government production targets or they may be forced to serve in the army if the government plans to increase its military strength. Hence the right of freedom of choice is a very important right and the private enterprise system must be appreciated for providing this right. Finally the fourth right basic right in a private enterprise system is the right to compete. Not only is there competition in the seller’s market but there also is competition in the buyer’s market. In the seller’s market firms compete with each other to provide goods and services demanded by the economy. Firms have to lower their cost of production and provide a good quality product with a lower price as compared to their competitor or they may be forced out of business by other competing firms. As the firms fear that other competing firms may take their share of profits it promotes healthy competition in the supplier side of the economy. Competition among firms encourages diversity and the efficient use of scarce resources. On the buyer’s side too there is competition. As mentioned earlier firms provide goods and services demanded by the economy in a private enterprise system. There is no allocation of products to the buyers by the sellers, on the contrary who gets how much the produce depends on the income distribution in the economy. However consumers or buyers with more income and more purchasing power dominate the market. The concept of invisible hand, coined by Adam Smith, is essential to a private enterprise system. The Wealth of Nation, a book written by Smith in 1776, mentions that equilibrium price is achieved in the market, without government intervention, through the interaction of demand and supply and changes in market conditions (changes in demand or supply) still maintain equilibrium price as if an invisible hand is acting on the market (Perloff 2003). There are many advantages and disadvantages of a private enterprise system. Some of the advantages include: 1. Competition in the market forces firms to be innovative, efficient and provide good quality products to the customers. Innovation leads to lower cost, efficiency leads to better utilization of the firm’s resources and customers benefit by having good quality products at their disposal. An example is the market for mp3 players and iPods. There is a lot of competition in the market and firms try to come up with innovative products such as Apple coming up with its iPod which was a huge success. Firms in this market need to constantly innovate and improve their products to remain in the market. 2. Customers also have a diverse range of products to choose from. As firms have freedom to set up business in any industry it promotes diversification. For example with the increase in the number of firms as well as diversification of old firms to design new products, consumers have a lot of choice in the soft drinks industry. 3. As people are free to set up business in any industry it is easy to shift resources to more profitable ventures. If an industry is profitable it will attract attention from other firms who can easily enter the industry because there is no restriction on entry. Meanwhile there are also some disadvantages of a private enterprise system. Some of these include: 1. As firms are privately owned their main incentive is profit. Similarly in a private enterprise system there is little government intervention. Hence firms usually do not produce public goods as there is no or little profit in producing them. There is also no government to force firms to produce public goods. Also in this system firms produce goods that are desired by the economy; it may not be in the economy’s interest to demand those products. For example the economy demands cigarettes so firms produce cigarettes without taking into account the harmful effects as long as it is profitable for them. 2. There is unequal distribution of products. There are always some winners and losers in the buyer’s market. Those with a higher income are able to dominate in the market and buy more products as compared to people with lower incomes. 3. Sometimes firms become very large and eliminate competition from their market. Such firms become monopolies. These firms need to be regulated by the government because they may exploit the consumers by charging a higher price. Usually monopolies are inefficient as they produce at an output level below optimal output to increase their profits. Hence a private enterprise system must be regulated in some way. References: Gitman, L. J., & McDaniel, C. (2007). The Future of Business: The Essentials. Cengage Learning Kurtz, D. L., & Boone, L. E. (2011). Contemporary business. Hoboken, N.J: Wiley Perloff, Jeffrey. M. (2003). Microeconomics, 3rd Edition. Berkeley, California: Addison-Wesley Read More