Capitalism and the Market System

Private Property Freedom of Enterprise Freedom of Choice Self-InterestCompetitionRoundabout Production SpecializationDivision of Labor Medium of Exchange BarterMoneyConsumer Sovereignty Dollar VotesInvisible Hand Vocabulary

6 Tenets of Capitalism Private property Freedom of enterprise and choice Self-interest Competition Reliance on the market system Limited role for government

Private Property Resources owned by individuals not government (private ownership not public) Individuals can obtain, control, employ, and dispose of resources as they see fit Encourages investment, innovation, and economic growth

Private Property Freedom to negotiate binding legal contracts Rights to intellectual property Patents Copyrights Right to bequeath: designate who receives property upon death

Freedom of Enterprise and Choice Freedom of Enterprise: private businesses are free to obtain, organize, and sell resources in the markets of their choice

Freedom of Enterprise and Choice Freedom of choice: Owners can employ or dispose of their property and money as they see fit Workers are free to enter any line of work for which they are qualified Consumers are free to buy the goods and services which satisfies their wants (within the limits of their incomes)

Self-Interest Driving force of capitalism Individuals do what is best for themselves Entrepreneurs attempt to maximize profit or minimize loss Property owners attempt to get the highest price for the sale or rent of their resources Workers attempt to find a job which offers the best combination of wages, benefits, and working conditions

Competition Large number of buyers and sellers operating in a market Large number of independently acting producers so no one has influence over market supply and therefore price Large number of independently acting consumers so no one can manipulate the market by refusing to buy at the market price

Competition Free to enter or exit the market Few barriers to entry Example: Licensing requirements that make it impossible for new firms to enter a market

Market System Market: any arrangement that brings buyers and sellers into contact with each other Society decides how it allocates it resources and distributes the resulting output through the market system The market system answers the three basic economic questions: What to produce How to produce For whom to produce

Limited Government Pure capitalism = No government interference in the market Reality: In our mixed system, we attempt to have limited government interference

Additional Characteristics of all Modern Economies Advanced technology and large amounts of capital goods Specialization The use of money

Technology and Capital Goods The most direct method of production is usually the least efficient Example: a farmer using his bare hands to plant 50 acres Tools of production (capital goods) and improved technology increase output

Specialization Self-sufficiency breeds inefficiency Division of labor:human specialization Enables individuals to concentrate on their abilities and skills Talents can be used most efficiently Allows learning by doing Repetition encourages faster development of skills and leads to improved techniques Saves time No shifting from one task to another Geographic specialization Regions produce what the goods that are most efficiently produced and trade with other regions.

Use of Money Money: a convenient social invention to facilitate exchanges of goods and services It must be generally acceptable to sellers in exchange for goods and services Money is a medium of exchange (a means of exchanging goods and services without bartering) Barter: swapping goods for goods

Consumer Sovereignty and Dollar Votes Consumers have the ultimate authority in determining the types and quantities of goods produced Consumers register their wants by spending their money on certain goods When they spend money on a good, they are voting for the production of that good

Competition and the Invisible Hand Firms seek their own self-interest but in doing so promote the interests of society as a whole. In other words, it is in the best interest of a firm to efficiently produce what society wants or they will not survive.

Three virtues of the market system Efficiency Resources are used efficiently and are used in the production of goods and services most wanted by society Incentives Incentives for improvement and innovation Freedom Personal freedom to further self-interests