1. Chapter 23 – Comparative Economic Systems Section 1 – Capitalism

2. Factors of Production Factors of Production = basic resources which are used to make all goods and services 1.Land – all natural resources (i.e. water, minerals, trees, and the land itself) 2.Labor – human resources; in a free market economy, people “own” their labor and can sell it to any employer. 3.Capital – all the human-made resources that are used to produce goods and services. Physical capital includes money, buildings, machines, computers, etc. Human capital includes knowledge and skills that workers have. Capital is a product of the economy that is then reinvested into the economy. Capitalist – someone who owns capital and puts it to productive use. The US economy is called capitalism because it depends on thousands of capitalists. 4.Entrepreneur – an individual who combines land, labor, and capital to produce goods or offer services. They start businesses and make them grow.

3. Free Enterprise System Free enterprise system – an economic system in which physical capital is privately or corporately owned, and investments are decided by private decision than by state control. Also known as a free market. –Freedom of choice: Consumers choose from a variety of products and services Entrepreneurs can switch from one business to another Workers can quit jobs and seek other jobs –Fundamental factors in a free enterprise system 1.Private ownership – private individuals and companies own most of the factors of production. 5 th and 14 th Amendments say that no person may be deprived of property without due process of law. And the 5 th Amendment says that “just compensation” must be paid to owners when private property is taken for public use. 2.Individual initiative – Individual decisions on how to use the factors of production. 3.Profit – Individuals entitled to the benefits of their decisions. 4.Competition – tends to hold down prices and keep quality high.

4. Laws of Supply and Demand Supply – the quantity of goods or services for sale Demand – the desire of potential buyers for those goods and services. When supplies ↑ prices ↓, when supplies ↓ prices ↑ When demand ↑ prices ↑, when demand ↓ prices ↓ Monopoly – a firm that is the only source of a product or service. No competition. Trust – a type of monopoly in which several companies in the same business get together to eliminate competition and regulate prices. Government has laws to restrict trusts and monopolies.

5. Laissez-Faire Theory Laissez-Faire capitalism – Government activity should be limited to: 1.Foreign relations and national defense 2.Police and courts to protect the property and the health, safety and morals of the people 3.Functions that cannot be performed by private enterprise at a profit. Adam Smith, The Wealth of Nations – written in 1776, this is the classic expression of laissez-faire theory. It states when all individuals can seek their own private interests, the “invisible hand” of the market place promotes the general welfare. We have never actually had a pure laissez-faire system.

6. A Mixed Economy Mixed economy – one in which private enterprise and government action coexist. US has a mixed economy. Government regulates businesses, such as monopolies and trusts, as well as zones (remember local gov’t), protects the environment, provides for safety of food and medicines, etc. Government builds roads, operates the post office, Social Security and other insurance, offers grants and loans to help entrepreneurs, operates public education, some water and power stations, recycling, mass transit.

7. Types of Business Organizations Sole proprietorship – businesses owned by one individual. 75% (3/4) of the businesses in the US are sole proprietorships. –Advantages: owner has total control and can make decisions quickly without the approval of others –Disadvantages: owner is personally liable for all of the debts of the business; business is limited by the owner’s ability to contribute resources and manage the business Partnerships – businesses owned by two or more individuals. –Advantages: different people bring different strengths; can use resources of more than one person for capital –Disadvantages: differences can lead to conflict; one partner could die or retire; partners are personally liable for all of the debts of the business. Corporations – businesses owned by many owners called shareholders; can continue forever because a shareholder’s death does not affect the life of the corporation; corporation has same legal status as a person. –Advantages: capital from hundreds or thousands of investors; shareholders are only liable for the amount of money they choose to invest. –Disadvantages: income is taxed twice – corporation pays a tax on its profits and shareholders are taxed on their dividends.

8. Profit and Loss Profit = Amount of money the business earns – (minus) the costs associated with earning that money. Example: You buy a car to start a business delivering groceries. The amount of money you earn after subtracting the cost of buying and operating the car and the cost of your salary, equals your profit. If the amount left after costs is negative, it is a loss. Profit is what drives the capitalist economy. People go into business mostly for the profit motive.