BUSINESS MANAGEMENT PAVONE 3-3 FUNDAMENTALS OF CAPITALISM

PRIVATE PROPERTY

INTRODUCTION Some economic-political systems either do not permit ownership of property (communism) or may impose limits on ownership (socialism). One of the basic features of capitalism is the right to private property. Other features include the right of each business to make a profit, to set its own prices, to compete, and to determine the wages paid to workers.

PRIVATE PROPERTY Private Property – Consists of items of value that individuals have the right to own, use and sell. People can own land, hire labor and own capital goods, and can use these resources to produce goods and services. Individuals also own the products made from their use of land, labor and capital goods.

PROFITS Profit – The incentive as well as the reward for producing goods and services; computed by subtracting the total costs of producing the products from the total received from customers who buy them. Profits are typically overestimated by society. Typically, the average profit for a business is 5 percent of total receipts, while the other 95 percent represents costs. Some businesses have higher profit percentages, while others have lower percentages or losses.

PRICE SETTING

PRICE SETTING - DEMAND Demand – The number of products that will be bought at a given time at a given price. Demand is NOT the same as a want. There is a relationship between price and demand: With increased demand, prices generally rise in the short run. When demand decreases, prices will likely fall.

PRICE SETTING - SUPPLY Supply – Refers to the number of like products that will be offered for sale at a particular time and at a certain price. If there is a shortage in the supply of a product, the price of the product will go up; when the supply rises, the price will decrease (example: gasoline, agriculture). Price changes indicate to businesses what is profitable or not profitable to produce. Prices are determined by forces of supply and demand. Where supply meets demand is where the market price of a product lies. If demand drops, profit drops; if demand increases, profit increases; if supply and demand lines never cross, the product will not be produced.

COMPETITION Competition – Rivalry among sellers for consumers’ dollars. In a free-enterprise system, sellers try to make a profit and buyers try to buy quality goods at the lowest possible prices. Competition serves to ensure consumers will get the best prices. Price competition occurs when a firm takes business away from its competitors by lowering prices for identical goods; though nowadays, more competition takes place in the form of non- price competition. Competition is the opposite of monopoly, which is the existence of only one seller of a product, therefore, consumers have no choice.

INCOME DISTRIBUTION In a free-enterprise economy, the share of goods produced that an individual receives is determined by the amount of money that person has to purchase goods and services. People receive income by contributing labor and also receive income as interest on money they lend to others, as rent for land or buildings they own, and as profits if they own a business. The same factors that determine the prices of goods are also important factors in determining wages paid for a particular kind of labor (example: supply of unskilled workers is high, therefore, income is low. Supply of specialized or skilled workers is low, therefore, income is high).