Free Enterprise: Profit, Risk, Competition & Productivity

Instructor: Tiffany Spencer

Tiffany has taught ESL online and has a master's degree in business administration.

This lesson will discuss the concept of free enterprise as an economic system. It will also discuss the key motivating factors of free enterprise, their benefits, and their challenges. These factors include profit, risk, competition and productivity.

What is Free Enterprise?

Free enterprise is an economic system wherein business and industry operate with minimal government intervention. In other words, in a free enterprise system, the government does not heavily regulate or interfere within business or industry. Additionally, in this system, very few businesses are owned by the government, and instead, the majority of businesses are owned by individuals, groups of individuals, or other businesses. These owners are allowed to decide what type of business they want, when to start a business, and how to operate that business with minimal government involvement. In a free enterprise system, you could decide to start a lemonade stand tomorrow, and after meeting minimal requirements, you could begin vending lemonade.

Lemonade Stand

There are four primary factors that drive the economy of a free enterprise system: profit, risk, competition, and productivity. These factors, in theory, keep the economy running efficiently.

Profit

Everyone wants to make money, including businesses. When a business makes money, it is called profit. More specifically, profit is the amount of money earned by a business from the sale of products or services after paying all costs, expenses, and taxes. When a business earns profit, that money belongs to the business owner or owners, who decide whether to keep the profit themselves or allow the business to keep it and use it. So, following our previous example, if you invested $100 in your lemonade stand and product, and sold $200 in lemonade from that investment, your profit would be $100 ($200 revenue - $100 investment = $100 profit). At that point you would need to decide a few things: (1) how much money you need for your time; (2) how much money to reinvest in the business by buying more or new product, or perhaps, opening another stand.

Owner vs Business-Retained Profit

Keeping profit within a business can be a good strategy, as it may allow a business to expand facilities, equipment, operations, or make other investments, allowing even greater future profits. Despite the potential benefits of allowing a business to keep and use profits, in the end, all owners invest in a business to earn money. You're not in the lemonade business just because you like lemons! Because of this, a business is intrinsically motivated to make profits, keep making profits, and increase the profits made. The desire for profit is the primary motivator of the free enterprise economy.

Drive to Keep Increasing Profit

Risk

Risk, at its simplest, is the exposure to loss or failure. Nothing in this world can be done without some level of risk. In business, risk is the potential loss of income or assets, and includes the possibility of complete failure of the business itself. In our example you invested $100 in a lemonade stand and planned to sell lemonade for $1.00 per cup. With your investment money, you purchased a wooden stand, some pitchers and spoons, disposable cups, and some lemonade to sell. The primary risk to you in this business is the loss of up to $100 cash, if people to do not like or buy enough of your lemonade. Beyond cash, there is some additional, secondary potential risk to you in the value of the time you spend on the business. This is particularly true if your time may be more valuable (i.e. earn more money) elsewhere.

Risk

Risk is inescapable, and can be significant in a free enterprise system. As discussed above, there are few government interventions -- this means few restrictions, but also few protections. Nevertheless, risk is also an attractive motivator in the free enterprise system, because higher risk usually means more profit upon success.

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