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Features of Capitalism
• The U.S. economy is built on capitalism and free enterprise.
• Capitalism is an economic system in which private citizens own and use the factors of production to seek a profit.
• Free enterprise is an economy in which competition is allowed to flourish with a minimum of government interference.
Consumer Sovereignty
• Markets are places where different sectors of the economy interact, and their exchanges determine the prices of goods and services.
• Businesses try to produce the products people want most.
• Because of this, we use the term consumer sovereignty to describe the consumer as ruler of the market, the one who determines what products will be produced.
Choice
• Choice is a key element for free enterprise.
• We are free to choose the occupation we want and where we want to work.
• We can choose the products we will buy.
• Businesses can choose the products they will produce and offer for sale.
Consequence
• Along with the freedom to choose comes the responsibility to accept the consequences of the decisions.
• If an entrepreneur starts a business that fails, the government usually won’t help out.
The Right to Own Property
• Under capitalism, we also have private property rights.
• We are free to own and use, or dispose of, our own property as we choose as long as we do not interfere with the rights of others.
• These rights give us the incentive to work, save, and invest.
Competition
• Capitalism thrives on competition—the struggle between buyers and sellers to get the best products at the lowest prices.
• Competition rewards the most efficient producers and forces the least efficient out of business. Competition results in efficient production, higher- quality products, and more satisfied customers.
Profit & Profit Motive
• Profit is the money left over after all costs of production have been paid.
• The profit motive is the driving force behind free enterprise and capitalism. People are willing to invest in a business venture and risk losing their investment for the chance to earn a profit.
Voluntary Exchange
• Voluntary exchange is the act of buyers and sellers freely and willingly engaging in market transactions.
• As long as exchanges are voluntary, both buyer and seller must feel that they benefit from their exchange, or they will not do it.
The Spread of Capitalism
• Capitalism developed gradually over hundreds of years.
• Two concepts underlie the market system:– People Can Work for Economic Gain, and– Government Should Have a Very Limited
Role in the Economy
Economist-Adam Smith
• In his book The Wealth of Nations, Scottish economist Adam Smith scientifically described the basic principles of economics for the first time.
• Smith believed that individuals, in seeking profit, end up benefiting society as a whole.
Laissez-Faire
• From the writings of Smith and others came the idea of laissez-faire, meaning “to let alone.”
• According to this philosophy, government should not interfere in the marketplace. Government’s role is to ensure free competition.
• Many American Founders were influenced by Smith’s book.
Other Market Systems-Command Economy
• In a pure command economy, the central government makes the major economic decisions. Individuals have few choices and little influence over the economy. This system has also been called a controlled economy, socialism, or communism.
• Socialism is the belief that the means of production should be owned and controlled by society, either directly or through the government.
• Under communism one class would evolve, property would all be held in common, and there would be no need for government.
Other Market Systems- Mixed Economies
• A mixed economy combines basic elements of a pure market economy and a command economy.
• Most countries have a mixed economy that combines private ownership of property and individual decision making with government intervention and regulations.
Other Market Systems-Traditional Economies
• In traditional economies, economic decisions of what, how, and for whom to produce are based on custom or habit.
• The way of life is passed down from generation to generation.
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