Capitalism is an economic and social system in which capital, the non-labor factors of production (also known as the means of production), is privately owned; labor, goods and capital are traded in markets; and profits distributed to owners or invested in technologies and industries. Capitalism gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world.

Variants on capitalism may include, depending on the theorist, such concepts as anarcho-capitalism, corporate capitalism, crony capitalism, finance capitalism, laissez-faire capitalism, technocapitalism, Neo-Capitalism, late capitalism, post-capitalism, state capitalism and state monopoly capitalism. There are also anti-capitalist movements and ideologies including Anti-capitalism and negative associations with the system such as tragedy of the commons, corporatism and wage slavery.

How capitalism works Edit

Neoclassical economics explain capitalism as comprised of individuals, enterprises, markets and government. The following section is an explanation only through the point of view of neoclassical economists and does not conform to the views of heterodox economists such as John Maynard Keynes, Thorstein Veblen, Joseph Schumpeter or Karl Marx as seen below.

Individuals Edit

Individuals engage in a capitalist economy as consumers, labourers, and investors. For example, as consumers, individuals influence production patterns through their purchase decisions, as producers will change production to produce what is most profitable (most often what consumers want to buy).

As labourers, individuals may decide which jobs to prepare for and in which markets to look for work. As investors they decide how much of their income to save and how to invest their savings. These savings, which become investments, provide much of the money that businesses need to grow.

Businesses Edit

Business firms decide what to produce and where this production should occur. They also purchase inputs (materials, labour, and capital). Businesses try to influence consumer purchase decisions through marketing and advertisement as well as the creation of new and improved products. Driving the capitalist economy is the search for profits (revenues minus expenses). This is known as the profit motive, and it helps ensure that companies produce the goods and services that consumers desire and are able to buy.

To be successful, firms must sell a quantity of their product at a certain price to yield a profit. A business may consequently lose money if sales fall too low or costs are incurred that are too high. The profit motive also encourages firms to operate efficiently by using their resources in the most productive manner. By using less materials, labour or capital, a firm can cut its production costs which can lead to increased profits.

Commerce plays an important role in determining the growth rate of the capitalist economy. An economy grows when the total value of goods and services produced rises. This growth requires investment in infrastructure, capital and other resources necessary in production. In a capitalist nation, businesses decide when and how much they want to invest for these purposes.

The market Edit

The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). This results in a market equilibrium, with a given quantity (Q) sold of the product. A rise in demand from D1 to D2 would result in an increase in price from P1 to P2 and an increase in output from Q1 to Q2.The market is a term used by economists to describe a central exchange through which people are able to buy and sell goods and services. In a capitalist economy, the prices of goods and services are controlled mainly through supply and demand and competition.

Supply is the amount of a good or service produced by a firm and available for sale. Demand is the amount that people are willing to buy at a specific price. Prices tend to rise when demand exceeds supply and fall when supply exceeds demand, so that the market is able to coordinate itself through pricing until a new equilibrium price and quantity is reached.

Competition arises when many producers are trying to sell the same or similar kinds of products to the same buyers. Competition is important in capitalist economies because it leads to innovation and more reasonable prices as firms that charge lower prices or improve the quality of their production can take buyers away from its competitors.

Furthermore, without competition, a monopoly or cartel may develop. A monopoly occurs when a firm supplies the total output in the market and means that the firm can limit output and raise prices because it has no fear of competition. A cartel is a group of firms that act together in a monopolistic manner to control output and raise prices. Many countries have competition laws that prohibit monopolies and cartels from forming.

However, even though antimonopoly laws exist, large corporations can form near monopolies in some industries. Such firms can temporarily drop prices and accept losses to prevent competition from entering the market and then raise them again once the threat of entry is reduced. In many capitalist nations, public utilities (communications, gas, electricity, etc), are able to operate as a monopoly under government regulation due to high economies of scale.

Income Edit

Income in a capitalist economy depends primarily on what skills are in demand and what skills are currently being supplied. People who have skills that are in scarce supply are worth a lot more in the market and can attract higher incomes. Competition among employers for workers and among workers for jobs, help determine wage rates.

Firms need to pay high enough wages to attract the appropriate workers; however, when jobs are scarce workers may accept lower wages than when jobs are plentiful. Labour unions and the government also influence wages in capitalist nations. Unions act to represent labourers in negotiations with employers over such things as wage rates and acceptable working conditions. Most countries have an established minimum wage and other government agencies work to establish safety standards.

The government Edit

In capitalist nations, the government does not prohibit private property, or prevent individuals from working where they please. The government also does not prevent firms from determining what wages they will pay and what prices they will charge for their products.

Under some versions of 'capitalism' the government also carries out a number of economic functions. For instance, it issues money, supervises public utilities and enforces private contracts. Laws, such as policy competition, protect against competition and prohibit unfair business practices. Government agencies regulate the standards of service in many industries, such as airlines and broadcasting, as well as financing a wide range of programs. In addition, the government regulates the flow of capital and uses things such as the interest rate to control factors such as inflation and unemployment.

While in other versions, the governing body/bodies have no monopoly characteristics or legal exceptions.

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