Capitalism



Capitalism is defined as a free market system built on private ownership;The idea that owners of capital have property rights that entitle them to earn a profit as a reward for putting their capital at risk in some form of economic activity.

Antonym: Communism

Unlike earlier systems, capitalism used the excess of production over consumption to enlarge productive capacity rather than investing it in economically unproductive enterprises such as palaces or cathedrals. The strong national states of the mercantilism era provided the social conditions, such as uniform monetary systems and legal codes, necessary for the rise of capitalism.
ba_jet_h250.jpg
Here is a privately owned airplane. It relates to capitalism because this concept means private ownership of property exists.

Basics:

  1. private ownership of property exists
  2. aggregates of property or capital provide income for the individuals or firms that accumulated it and own it
  3. individuals and firms are relatively free to compete with others for their own economic gain.
  4. the profit motive is basic to economic life[1]

Summary:

Capitalism is when the individual or business who owns the property can use it however they want, and earn their own profits from their own resources.
  1. http://www.answers.com/topic/capitalism


Free Enterprise


The freedom of private businesses to operate competitively for profit with minimal government regulation. [1]


Free enterprise means competition

Free enterprise is the freedom of individuals and businesses to operate and compete with a minimum of government interference or regulation. It enables individuals and businesses to create, produce, transform, develop, innovate and compete in the marketplace. As they are able and willing, enterprising people produce goods and services for profit, offer their labor for wages and own the resources needed to produce and sell goods and services. In this system, no one forces people to be creative, productive or enterprising. Instead, they pursue what they believe to be best for them. By producing the goods and services that society values most highly, a free enterprise system results in the greatest efficiency, or lowest costs, of any economic system. It is the system most compatible with individual freedom and political democracy. [2]


Here is a video which will help you to better understand free enterprise (it is for a contest, but its opening captures the spirit of American Free Enterprise):
//http://www.youtube.com/watch?v=B32kDMd962U//

The Building Blocks of a Free Enterprise System:

Most free enterprise systems consist of four components: households, businesses, markets and governments.

  1. Households—the Owners. In a free enterprise system, households—not the government—own most of the country’s economic resources and decide how to use them. One of the resources that households possess is their labor, which they sell to existing firms or use to form new businesses. In addition to selling their resources where they can get the highest price or largest profit, households also act as consumers. The wages and salaries of households purchase about two-thirds of all the production in the United States. Consumers vote with their dollars, thereby directing production toward the goods and services they want businesses to provide. This is called consumer sovereignty. [2]
  2. Businesses—the Organizers. Businesses organize economic resources to produce a good or service. The people who start businesses are called entrepreneurs. They are the organizers and innovators, constantly discovering new and better ways to bring resources together in the hopes of making a profit. Profit fuels the engine of business. Entrepreneurs, lured by the potential for profits, create new businesses to satisfy consumers’ needs and desires. The inability to make profits signals businesses to close or to reorganize their resources more efficiently. Efficiency means that resources are being used to produce the goods and services that society most desires at the lowest economic cost. In a competitive industry, the presence or absence of profits sends an important signal about the industry’s economic efficiency. [2]
  3. Markets—the Brokers. How and where do buying and selling activities take place? The answer is, in markets. Although markets are not necessarily people, they act as agents—something like a stockbroker or a real estate agent—to bring buyers and sellers together. Over time, markets have become increasingly complex. Now, buying and selling can occur 24 hours a day from anywhere in the world via the Internet. A market is any place or any way that buyers and sellers can exchange goods, services, resources or money. There are three categories of markets in a free enterprise society: resource markets, product markets and financial markets. Households go through resource markets to sell their labor to businesses. Businesses go through product markets to sell goods and services to households. And both households and businesses use financial markets to borrow and save money. Typically, businesses borrow money that households save, using financial institutions as the intermediary. [2]
  4. Governments—the Protectors. The cornerstone of a truly free enterprise economy is the absence of government interference in economic matters. However, the government still plays an important role in any free enterprise system. This is because unlimited freedom is impossible: one person’s freedom may sometimes conflict with another’s. As Supreme Court Justice William O. Douglas once put it, “My freedom to move my fist must be limited by the proximity of your chin.” The main role of government in a free society, then, is to define and enforce the rules of society. Government has the coercive power to maintain law and order, protect people’s right to own property and enforce voluntary contracts people enter into. In essence, government provides the umbrella under which the free enterprise system operates. Governments also provide goods, such as national defense, that the private market alone would have a hard time producing. [2]

Citations
[1] http://www.answers.com/topic/free-enterprise
[2] http://www.dallasfed.org/educate/everyday/ev5.html



Summary:

The government interferes very little with individuals and businesses competing for consumers.



Voluntary Exchange



The process of willingly trading one valuable commodity (good, service, or resource) for another.


candy.jpg
Both members voluntarily exchange money for candy

Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.Free trade increases worldwide material standards of living.Voluntary exchange among people or organizations in different countries gives people a broader ranger of choices in buying goods and services.


Here is a video which will help you to better understand voluntary exchange:
http://www.youtube.com/watch?v=85xI5UJglOw



Summary:

When everyone trading is doing so because they want to.


Profit Motive


profit_movite.gif
The "profit motive," speaking broadly, means a man's incentive to work in order to gain something for himself — in economic terms, to make money.
This is the motive that drives people to gain a profit in economics.

The desire for gain as a motive in economic activity. This motive is obviously both widespread and powerful. It is not the only motive in life for most people: they want a vast assortment of things, ranging from a quiet life, power, sex, friends, honors, the satisfaction of getting things to work, self-respect, and the respect of others that derives from a reputation for hard work.


Summary:

Profit motivation is the motivation to make money!


Consumer Sovereignty


It is the power of consumers to decide what gets produced.

In a free market, the consumers ultimately dictate what is to be produced. While the capitalists and entrepreneurs might steer the economy, they ultimately take orders from the consumers by responding to demand for certain goods and lack of demand for others. Provided that they wish to remain in business and generate a positive net income, they need to satisfy the preferences of consumers, who are the sources of said income. Their personal profit, hence, is inextricably linked to furnishing the goods and services their customers desire. If an entrepreneur consistently refuses to do this, he will simply lose money until he is no longer able to sustain his entrepreneurial function.[1]

consumer.jpeg
The man in the photo is deciding what to buy. If he choses a certain item from a cerain brand, he is basically voting for that item. Which in turn is a vote on what to produce.

Summary:

The consumer keeps the economy moving. The consumer buys from business, the businesses create jobs which gives money to consumer to continue the cycle.
  1. http://www.helium.com/items/112764-the-concept-of-consumer-sovereignty-in-economic-theory

Means of Production


It is the power of consumers to decide what gets produced.
The means of production of a basket is labor and wheat
The means of production of a basket is labor and wheat

Means of production (abbreviated MoP; German: Produktionsmittel) refers to physical, non-human, inputs used in production including factories, machines, and tools; along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital. They include two broad categories of objects: instruments of labour (tools, factories, infrastructure, etc.) and subjects of labour (natural resources and raw materials). People operate on the subjects of labour, using the instruments of labour, to create a product; or, stated another way, labour acting on the means of production creates a product.[1]
The term can be simply and picturesquely described in an agrarian society as the soil and the shovel; in an industrial society, the mines and the factories.



Summary:

Means of production is how products are made.

SS.D.1.4. The student is able to define the factors of production.




Production Possibility Frontier


PPF represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.

If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.


external image economics1.gif

Imagine an economy that can produce only wine and cotton. According to the PPF, points A, B and C - all appearing on the curve - represent the most efficient use of resources by the economy. Point X represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources. Basically, outside of the PPF curve, where Y is, represents the impossible and inside the PPF curve represents the possibilities.

Summary:

With a limited amount of resources, there is a limited amount of goods that can be produced. This limit is known as the Production Possibility Frontier.


Citation:
http://www.investopedia.com/university/economics/economics2.asp

Profit


Profit is making a gain in business activity for the benefit of the owners of the business

This graph shows a businesses profit growth.
This graph shows a businesses profit growth.

For example, say you invest $100,000 to start a business, and in that year you earn $120,000 in profits. Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).[1]




  1. http://www.investopedia.com/terms/e/economicprofit.asp#

Private Property Rights


Property rights are the formal and informal arrangements that govern the ownership, use, and transfer of assets.[1]

Formal property rights are encoded into law, statute, ordinance, or contract. In most developed nations, this function is performed by legislative bodies. The executive branch may also participate in the definition of property rights when, for example, the legislature delegates regulatory functions.Title is the legal evidence of the right of possession or control over property. Informal property rights may be based on custom, tradition or precedent.[1]

The exclusive authority to determine how a resource is used. All economic goods have a property rights attribute. This attribute has three broad components:
  • This picture illustrates an individual’s rights to the peaceful possession, control and enjoyment of the land/goods they own.
    This picture illustrates an individual’s rights to the peaceful possession, control and enjoyment of the land/goods they own.
    The right to use the good
  • The right to earn income from the good
  • The right to transfer the good to others

Citations:
foundation for teaching economics [1]

Summary:

Everybody has the right to own their own things.