The Fundamentals of Capitalism

Business Management

Mrs. Demers

Bell Work Review – Monday, 11/11. All resources are _____________________.

2. Utility is ____________________________.

3. The five economic utilities are ___________________________________.

4. The four factors of production are ___________________________________.

5. The three major types of economic systems are ________________________________.

6. The three economic-political systems are ___________________________________.

Standards:

BMS3.11 Explore economic principles related to business environment. BMS3.11.3 Explain three economic systems:

customer, directed, free enterprise.

  BMS3.24 Discuss the application of

economic principles to business operations. BMS3.24.1 Explain basic economic concepts and

terminology. BMS3.24.2 Describe the characteristics of a free

enterprise system.

Learning Target

Students will be able to:

Describe why private property is important to capitalism.

Describe how prices are set in a capitalistic system.

Key Terms:

Private property Profit Demand Supply Competition

Enduring Understanding

One of the basic features of capitalism is the right to private property, a right reserved by the constitution and protected by the government. Other key features include the right of each business to make a profit, set its own prices, to compete, and to determine the wages paid to workers.

Pillars of Capitalism

Private property rights Profit incentive Market price system Competition Labor & income distribution system

Private Property Rights

The principle of private property is essential to capitalism. Private property consists of items of value that individuals have the right to:

OwnUseRentSell

Profit Motive

In capitalism, profit is the incentive and reward for producing goods and services.

Calculating Profit:

Total Sales – Total Costs = Profit or Loss

The average profit earned by businesses is approximately 5% of sales receipts.

Market Price System

Demand Supply Market Clearing Price

Demand

Supply

MCP

Market Price SystemDemand Demand for a product is the number of

products that will be bought at a given time and a given price.

Demand only includes individuals willing and able to buy.

An increase in demanders can drive prices up. Negative relationship between price and quantity

demanded. Demand is less at higher prices.

Market Price SystemSupply The number of units of a product that will be

offered for sale at a given point in time and a given price.

A shortage in supply can drive prices up. There is a positive relationship between supply

and price. The quantity supplied is higher at higher prices.

Bell Work – Tuesday 11/2 List 5 pillars/characteristics of capitalism.

1. P _ _ _ _ _ _ P _ _ _ _ _ _ _ R _ _ _ _ _

2. P _ _ _ _ _ I _ _ _ _ _ _ _ _

3. M _ _ _ _ _ P _ _ _ _ S _ _ _ _ _

4. C _ _ _ _ _ _ _ _ _ _

5. L _ _ _ _ & I _ _ _ _ _ D _ _ _ _ _ _ _ _ _ _ _

System

Market Price SystemMarket Clearing Price (MCP)

MCP is the price at which a producer can meet costs and make a reasonable profit.

MCP is the price at which consumers will buy enough of the product for the producer to make a profit.

MCP is the price at which supply equals demand. MCP is the BEST price for a product at the given

time.

Competition

Sellers try to make a profit. Buyers try to buy quality goods at the lowest

possible prices. Competition is the rivalry between sellers for

consumers’ dollars. Benefits of competition:

Improved quality New product development Efficient business operations Lower prices Efficient use of scarce resources

Types of Competition

Price Competition: Trying to compete by charging the lowest price.

Non-Price Competition: Trying to compete by offering better quality,

services, and product features.

No/Limited Competition Monopoly:

The opposite of competition in which only one firm is producing the product.

Leads to high prices and no consumer choice.

Oligopoly: Very few competitors control an industry Can lead to collusion for high prices, limited

consumer choice, and strong barrier for new businesses to enter the market.

Income Distribution

People in the US receive income – wages and salaries- by contributing their labor to the production of goods and services and by earning interest on money they lend to others, as rent, and as business profit.

The laws of supply and demand also influence the amount individuals receive for wages and salaries.

Review Questions

1. Is the profit earned by businesses usually over or under estimated?

2. What feature of capitalism helps to keep prices fair and reasonable?

3. How might a business attract customers from a competitor?

4. List three examples of non-price competition.5. Is the demand high or low for unskilled

workers? 6. Is the supply of unskilled workers low or high?