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FUNDAMENTALS OF CAPITALISM
BUSINESS MANAGEMENT
PAVONE
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).