Section 1.1 Key Concept Review and Critical Thinking

1. The role of profit motive in the free enterprise system is to act as a way of measuring success. The more money one makes, the more successful the business is. The impact of the profit motive is that it encourages business owners to find ways to cut costs so as to maximize their profit. The role of competition in the free enterprise system is to lower the price of competing goods. With many competing goods on the market, the one thing that will distinguish them (since qualitatively they are similar) is the price. Savvy consumers will seek out the lowest price, and, given the competition between goods which are similar, the product with the lowest price will be bought ahead of the more expensive prices. Thus, the impact of competition is that businesses will seek to keep their prices low to attract consumers.
2. Price competition exists between competing businesses. Often they are able to lower price due to lower costs and a more experienced workforce. Additionally, producing in higher volumes will lower the cost as well. Thus the impact is that price competition encourages businesses to find ways to cut costs so as to lower the price of the product. Nonprice competition also exists between competing businesses. These factors include quality, service and reputation. Thus, nonprice competition impacts businesses by leading them to improve on quality, service, and reputation.
3. The difference between wants and needs is that needs are things one needs to survive, such as food and shelter. Wants are simply things desired by a consumer, but are not necessary for their survival.
4. The relationship between cost and profit and supply and demand is that supply and demand determine the cost of the product. When demand is high and supply is low, the price will go up. When supply is high and demand is low, the price will go down. Thus, the cost and consequent profit gained is determined by the supply and demand of the product.