Free Enterprise - Principle 11

Principle 11: Competition forces businesses to be efficient so they can produce quality goods and services for a low price.

Competition between companies is important. Why? Competition pushes each company to offer its goods or service at the highest quality and at the lowest price. In the drawing we see a wormy apple and a good apple. We see a good guitar and one with broken strings. Which apple would you buy? Which guitar would you buy? You want a low price but you expect quality as well!

Company “A” builds a bicycle that will last for two years and offers it for sale at $89.00. Company “B” builds a bicycle that will last for two years and sells it for $79.00. Company “B” will sell the most bicycles—they have the lowest price. If company “A” wants to stay in business they will need to find a way to build their bicycle for less so they can compete with the company “B” who offers lower prices.

Or if both companies sell their bicycle for the exact same price, but company “A” makes a better one, people will want to buy the better one. People want to buy a product with a good reputation, but they still want a good price. Companies compete against each other to see who can make the best product and sell it at the lowest price and still make at least a small profit. Competition is healthy for society. It keeps quality high and prices low.

A company needs to operate efficiently or it can’t compete. Each step in getting a bicycle to market must be efficient: Land and buildings are bought or rented. The owner has to bargain to get a good price. If not, he has a higher cost than his competitors long before he builds his first bicycle! Workers have to be hired. If the owner pays too much, he will have to charge a little more for his bicycle—and his price won’t be competitive. If he pays too little he won’t get any workers. It is the same with materials. To lower costs, he must pay low prices. But not so low that he gets poor quality.

This constant balancing between low price and high quality makes for efficiency. An efficient company will do well in the market place—it offers a quality product at competitive price.

Story

Kovrich was hurrying to where Allen and Andre were getting ready for tomorrow.

“Hey guys!” he called out. “I heard you start your new crew tomorrow. Will you hire me?” As he got closer, so no one would hear, he added, “I’ll work cheap! I know if you guys expect to make any profit at all, you can’t be paying big money like the other kids want.”

Andre and Allen looked at Kovrich with new interest. Here was a worker who understood their problems.

“So, what have you got in mind?” Allen asked. He and Andre didn’t want to cheat anyone. They wanted to be fair. But some of kids were asking for wages that would bankrupt the company almost before it got started!

“Well,” Kovrich began. “I’ve got a few buddies—and we don’t figure we need real big wages. If you can hire all five of us, you really won’t need the kids asking for the big money. It works out better for you, and my buddies and I get to be together in our own little group.”

Andre spoke. “Your offer is very tempting—we need efficiency so we can hold our costs down and that lets us hold our prices down. If can build a good hut as cheap or cheaper than anyone else figures they could, we’ll stay in business.”

“All right then!” Kovrich said excitedly. “We’ve got a deal—right?”

“Yes, we’ve got a deal” Allen said. Then both he and Andre shook Kovrich’s hand. “You will be here first thing in the morning with your four buddies. We will be looking for you. Welcome aboard!”

As Allen finished he saw Andre was already speaking to a group of kids. It was the ones wanting big money for their labor. He was telling them he did not have jobs for them after all.

After Andre left them they still didn’t seem to understand. They acted like they thought workers were in short supply—not many of them. But just the opposite was true. There were too many workers needing work for them to hold out for big money. Demand for laborers was low because there were so many of them—there was an oversupply of workers.

Andre did not give those workers jobs because he could not afford to hire them, pay for materials, pay back the bank and still make a profit. Someday they would learn: deals have to work for everyone—no single participant in the deal can come out ahead of the others.

Activity: A simple illustration, in which the students can participate, will make the point in this principle. Teacher picks three or four students to be store “A”. Pick the same number to be store “B”. They can come up front and “set up” their store. Have store “A” make a sign offering their loaf of bread for $1.75 and have the other store offer an identical loaf of bread for $1.50—they can have a sign too.

Ask the students who are not working in the store, “from which store do you want to buy bread?” Most will say store “B”. Ask the obvious, “why?” They will say something like the product is cheaper or they get a lower price.

Now, quietly warn students working in store “B” what you are about do so they don’t get mad at you. With dramatic flair, teacher goes to store “B” and buys bread. Play act opening your loaf of bread and, to your great dismay, you see it has worms in it! You are, play pretend, so upset! You throw the imaginary loaf of bread in the trash!

Now, ask the class if they still want to buy bread from store “B” even though it is a little cheaper! Most will say “No!” Ask, “Where will you tell your friends to shop?” Most will say they will tell their friends to go to store “A.”

Teacher can point out, “To compete, you have to have a good price AND a good product!” Teacher can ask, “Did it help store “B” to buy bread from a bakery that got a “real good deal” on some flour because it was old? No, it did not. The bakery held down costs, but not in a way that helped them. They should have tried to hold down costs in other ways. Perhaps they could have found cheaper help, or negotiated with the landlord for lower rent.

Explain to the students: If store “B” got a bad reputation and went out of business store “A” might, since there would be no competition, raise their bread price to $2.00. It they did that, is it likely that some other store would start selling bread? At least some students will see that $2.00 is too high and another store could reasonably compete and still make a profit while under selling store “A”.

Ask the students, “For what price do you think the new store would sell its bread?” Whatever price various students suggest, ask them to say why they think that would be the price.

Conclude with: “If a producer can keep his/her costs low, and still produce a good product, they can offer a quality product at a competitive price—this is the goal of most all businesses!”