Notes

Private enterprises are the backbone of market economies. They are controlled by private citizens and can range from sole proprietorships—like designers, plumbers, and architects—to large publicly traded companies such as Disney, Tesla, and Facebook. The business owners, rather than the government, make decisions related to the company's board of directors, profits, and marketing strategies. This part of the economy is referred to as the private sector.

No matter which markets they serve, all private enterprises have one goal: to maximize profits. But it’s not as simple as selling more products or services. Each time an enterprise creates a new product or service, it incurs certain costs that reduce the total profits it can make. This relationship between costs and profits determines how much output a business can produce.

There are two types of costs associated with doing business: explicit and implicit costs. Explicit costs are all the out-of-pocket costs associated with producing a product or service—wages paid to workers, payments to suppliers, and lawyer fees all count as explicit costs. Implicit costs are the opportunity costs of resources already owned by the firm and used in business. For example, a food manufacturer that uses its own building to produce various food items gives up the opportunity to generate income from renting the building out to another company.

Understanding the difference between explicit and implicit costs is key to understanding how profits are calculated. The three types of profits include accounting profits, economic profits, and normal profits. Accounting profits are the company’s total revenues generated from the sale of its goods and services, minus its explicit costs. Economic profits are the total revenue minus explicit and implicit costs. A good way to remember the difference between economic profit and accounting profit is to think of economic profits as the profits that include the firm’s implicit costs, while the accounting profits are profits that do not include implicit costs. Companies make normal profits when their economic profits are zero. When profits are zero, it means that companies have enough money to cover all of their explicit and implicit costs. Simply put, normal profit is the minimum level of profit a company needs to remain competitive in the marketplace.







Traditional Economic System
Let’s begin with the traditional economic system. These economies, in which government is not involved, tend to be found in rural or developing countries. Their economy is a result of beliefs, custom, and tradition. Many traditional economies are centered around a tribe or a family, and they are tied to the land. Farming, fishing, and hunting are common activities, while other groups are nomadic and they follow migrating herds with the seasons. Typically, people operating in a traditional economic system do not use money. They only produce what they need for their group. When there are leftovers, they barter or trade with a non-competing tribe. For example, a tribe that is reliant upon fishing will exchange food with a group that hunts. While these systems are not as advanced as more modern economies, they tend to have a greater democracy and produce less waste.





Command Economic System
The complete opposite of the traditional economic system is a command economic system. Here, the majority of the system is controlled or regulated by a centralized authority, often times a federal government. The government decides what is produced, how that’s done, how it’s distributed, and who does all of those tasks. Command economic systems arise out of the need for greater control over a large supply of resources, with the intent of fair distribution to the public. While command economic systems typically create greater volume at lower prices, the economic resources are typically owned and valued by the government themselves rather than private citizens. As such, there is no competition, very little innovation, and a lack of efficiency because there is no motivation to streamline operations.





Market Economic System
The market economic system is also known as a free enterprise system, and there is limited government involvement. The law of supply and demand determines the goods and services that are produced. Private citizens own those goods and services, and they have the right to profit from that ownership. They sell their products at the highest price possible, but consumers shop for the lowest prices they can find. Competition keeps prices fair, and the government’s only role is to make sure that the markets are open and functioning.

Ideally, a market economic system would prevent a government from becoming too powerful, such as it is with the command economy. However, it could also lead to unsafe situations when there is no regulation (such as the lack of clean water, food with harmful ingredients, or the closure of public schools). Currently, there is no existing free market economy—even the most capitalist countries have some form of regulation to prevent monopolies and to ensure public service. Marketing also plays an important role in free enterprise systems because it helps companies attract customers to their products and services.





Mixed Economic System
As the name implies, a mixed economy employs a combination of both a market and command economy. Mixed economies, like that of the United States, are commonly found throughout the world and vary from country to country. They offer the regulation of a limited government but the freedom and efficiency of a free market. However, they are still afflicted by similar issues in the other economic systems, such as the risk of the government becoming too powerful or the lack of regulation in important disciplines (such as mental health services and environmental protection). In this system, the public and private sectors both compete for resources in order to produce their goods and services. Welfare systems, environmental protection, employment standards, and publicly-owned companies are all characteristic of a mixed economy. Besides the United States, can you think of other examples of mixed economic systems?









Private enterprises are the backbone of our economy. They provide a majority of the goods and services that consumers use. Private enterprises create jobs, generate tax revenue, and help build and strengthen communities. Private enterprise and the business owners that run them are focused on maximizing profits. The four marketing economies are traditional, command, marketing, and mixed.