Capitalism & Market Principles: Essential Economic Concepts
Core Principles of Capitalism
Voluntary exchange is a second characteristic of capitalism, defined as the voluntary act of buyers and sellers freely and willingly engaging in market transactions.
Another major feature of capitalism is private property rights, which allow people to own and control their possessions as they wish. Private property gives people the incentive to work, save, and invest.
The Profit Motive
The profit motive is the incentive to improve one’s material well-being.
Profit Defined
Profit: The difference between the revenue from sales and the full opportunity cost of resources involved in producing those sales.
Key Economic Concepts & Terms
The Entrepreneurial Role
An entrepreneur is a risk-taking individual in search of profits; one of the four factors of production. Despite the high rate of failure among entrepreneurs, the dream of success is often too great to resist.
Government’s Role in the Economy
In a market economy, government often acts as a:
- Protector
- Provider
- Regulator
- Consumer
Social Security Program
Social Security: A federal program providing disability and retirement benefits that covers most working people.
Medicare Health Insurance
Medicare: A federal health insurance program for senior citizens, regardless of income.
Understanding Inflation
Inflation: A rise in the general level of prices. During times of high inflation, interest rates on loans tend to increase along with the prices of goods and services.
The Great Recession (2007-2009)
The Great Recession was a significant economic downturn that started in December 2007 and lasted until mid-2009.
Understanding Biofuels
Biofuels: Fuel made from wood, peat, municipal solid waste, straw, corn, tires, landfill gases, fish oils, and other waste.
Market Dynamics: Understanding Demand
What is Demand?
The calculation of demand comes down to only two variables—the price of a product and the quantity available at a given point in time.
Demand Schedule Explained
A demand schedule is a listing showing the quantity demanded at all possible prices that might prevail in the market at a given time.
The Law of Demand
The Law of Demand states that the quantity demanded varies inversely with its price.
Marginal Utility
Marginal utility: The extra usefulness or additional satisfaction a person gets from acquiring or using one more unit of a product.
Factors Influencing Demand
Change in Quantity Demanded
A change in quantity demanded can be caused by one event: a change in price.
Income Effect
Income Effect: The change in quantity demanded because of a change in price that alters consumers’ real income.
Substitution Effect
Substitution Effect: The change in quantity demanded because of a shift in relative prices.
Other Demand Shifters
Demand can also change due to shifts in various factors, including:
- Consumer income
- Consumer tastes
- Future expectations
- The number of consumers
- The price of related goods (e.g., substitutes or complements)
Complements Defined
Complements: Products that increase the use of other products when consumed together.
Economic Systems & Goals
Key Economic Goals
There are two significant issues with economic goals: they sometimes conflict, and there are opportunity costs associated with achieving them. Key economic goals include:
- Economic Freedom
- Economic Efficiency
- Economic Equity
- Economic Security
- Full Employment
- Price Stability
- Economic Growth
Challenges of Free Enterprise
A notable disadvantage of free enterprise capitalism is the tendency for wealth disparity, where the rich often get richer while the poor struggle to improve their economic status.
Optimal Conditions for Free Enterprise
Economists know that free enterprise economies work best when there are a large number of players – both buyers and sellers.