Page 78 - Business Principles and Management

Chapter 3 • Economic Environment of Business

Prices for many products and
services are determined by
the forces of supply and
demand. What causes the
price of gasoline to change
from time to time?

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and make a reasonable profit. It is also the price at which consumers will buy
enough of the product for the producer to make a reasonable profit.
If demand drops, profit drops; but if demand increases, the producer’s prof-
its will increase. If the profit gets quite large, other producers will enter into pro-
duction with similar sweatshirts, which will then increase the total supply and
lower the price. If the supply and demand lines never cross, the producer will
not make the goods, because not enough consumers will want the product at the
offered price and the profit reward disappears. If Juan Gonzales grows a new
type of apple but only a small number of people buy them, he will lose money
and stop growing those apples.

COMPETITION

In our free-enterprise system, sellers try to make a profit and buyers try to buy
quality goods at the lowest possible prices. This conflict of interest between buy-
ers and sellers is settled to the benefit of society by competition. Competition is
the rivalry among sellers for consumers’ dollars.
Competition in a free-enterprise system benefits society in many ways. To
attract customers away from other sellers, a business must improve the quality
of its products, develop new products, and operate efficiently in order to keep
its prices down. Thus, competition serves to ensure that consumers will get the
quality products they want at fair prices. In addition to benefiting consumers,
competition benefits the country because it tends to make all businesses use
our scarce productive resources efficiently. If a firm does not operate efficiently,
it will fail because customers will buy lower-priced or higher-quality products
from a firm that is operating efficiently. Often these competing firms are from
foreign countries. Competition in our economic system also provides the chance
for people to go into business for themselves and to share in the profits being
made by those already in business.
One aspect of competition is price competition. Price competition occurs when
a firm takes business away from its competitors by lowering prices for identical

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