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VARIABLE INPUT: An input whose quantity can be changed in the time period under consideration. This should be immediately compared and contrasted with fixed input. The most common example of a variable input is labor. A variable input provides the extra inputs that a firm needs to expand short-run production. In contrast, a fixed input, like capital, provides the capacity constraint in production. As larger quantities of a variable input, like labor, are added to a fixed input like capital, the variable input becomes less productive. This is, by the way, the law of diminishing marginal returns.

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CAPITALISM:

A type of economy, or economic system, based on--(1) private ownership of most resources, goods, and other assets; (2) freedom to generally use the privately-owned resources, goods, and other assets to get the most wages, rent, interest, and profit possible; and (3) a system of relatively competitive markets.
Capitalism is the predominant economic system in the modern global economy, but is best exemplified by the United States. Like all other real world economic systems, capitalism (also termed market-oriented economy) is a mixed economy, with allocation decisions made both through markets and by governments.

Institutions

The three key components, or institutions, underlying capitalism are private property, individual freedom, and competitive markets. A little insight into each is bound to provide greater insight into this economic system.
  • Private Property: At the top of the list of what makes an economic system capitalism is private ownership of resources, goods, and assets. In fact, the name capitalism was coined to emphasize the private, rather than government or public, ownership of capital. Private property means owners can decide when and where, and even if, to sell their resources, goods, and assets. For example, if Manny Mustard does not receive a satisfactory price for his world famous Deluxe Club Sandwich, he can choose not to sell. He can choose to direct his sandwich-making resources to another product.

  • Individual Freedom: The ownership of private property works best when owners have the freedom to use their resources as they see fit. A democratic political system provides the individual freedoms that work best with capitalism. For example, Manny Mustard has the freedom to make and sell his Deluxe Club Sandwich as well as the freedoms of speech, assembly, religion, and other such things found in the Bill of Rights of the U. S. Constitution. While economic and political freedoms do not necessarily go hand in hand, economic and political systems tend two work better when such freedoms coexist.

  • Competitive Markets: The institution that brings everything together for capitalism is competitive markets. Competition among buyers and sellers brings out the best, that is most efficient, use of resources. For example, Manny Mustard competes with other restaurants to satisfy the appetites of hungry Shady Valley residents. To sell his wares, he needs to offer the best possible sandwich at the lowest possible price. Moreover, to obtain the inputs he needs to produce his Deluxe Club Sandwich, he has to compensate resources for their opportunity cost.

Incentives and Efficiency

These three institutions create an economic environment that provides the incentives to achieve efficiency. Under capitalism, buyers and sellers have the freedom to direct their resources, goods, capital, and other assets through competitive markets to the highest valued uses.
  • Private property means people (buyers and sellers) receive the benefit and incur the cost of their actions. Manny Mustard stands to personally benefit by way of a higher income when he directs his sandwich-making resources to the production of highly-valued Deluxe Club Sandwiches.

  • Individual freedom means that people (buyers and sellers) can take advantage of available opportunities. Manny Mustard has the freedom to decide the best use of his sandwich-making resources.

  • Competitive markets then provide the mechanism through which people (buyers and sellers) can exercise their individual freedoms to use their private property in the best, most efficient, manner possible.

A Mixed Economy

While the emphasis in capitalism is on voluntary allocation decisions made through markets, like all real world economies, involuntary government allocation decisions are also part of the mix. Capitalism is a mixed economy, and economy that uses a mix of both markets and governments to allocate resources.

However, unlike socialism and communism, capitalism relies on markets to a much greater degree. In the United States, for example, around 70 percent of the resource allocation decisions are made privately through markets.

Governments have key roles to play in capitalism.

  • First and foremost, governments establish the legal "rules of the game." Without laws and regulations to ensure private ownership of property and guaranteed individual freedoms, competitive markets could not operate. Manny Mustard, for example, would not be able to produce and sell his Deluxe Club Sandwich without government enforcing the laws. Manny needs some degree of assurance that any potential customer who attempts to acquire ownership of a Deluxe Club Sandwich without payment (that is, stealing a sandwich) will be punished.

  • Second and also important, governments are responsible for providing certain types of goods that cannot be efficiently traded through markets. At the top of this list is public goods, such as national defense, education, environmental quality, and transportation. The very nature of these goods prevents buyers and sellers from reaping the rewards or incurring the costs of production, consumption, and exchange. For example, Manny Mustard cannot afford to construct and maintain the system of streets and highways throughout Shady Valley that customers use to reach his restaurant.

A Word or Two on Politics

Capitalism is one of those terms that tends to launch political debate. Some see capitalism as a representation of all that is good, others see it as the epitome of all that is bad. Of course, like any aspect of the real world, there is both good and bad.
  • Those who advocate the good side of capitalism like to point out that it promotes a more efficient allocation of resources, raises the average living standard of the population, and generally improves the quality of life. A lot of good to be had here.

  • Those who highlight the bad side of capitalism tend to note that it perpetuates an unequal ownership of resources, especially capital, which creates unequal opportunities. This inequality can then lead to an unhealthy concentration of wealth, uncompetitive control over markets, and liberty-threatening political influence.
Comparable to other issues, the pros and cons of capitalism tend to be divided along the lines of political liberals and conservatives.
  • Political conservatives are generally strong advocates of capitalism in large part because they own much of the capital and have the most to gain.

  • Political liberals are less favorably disposed toward capitalism because they are less likely to benefit, and perhaps are even harmed, from the concentration of wealth, market control, and political influence.

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Recommended Citation:

CAPITALISM, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: September 2, 2014].


Check Out These Related Terms...

     | mixed economy | market-oriented economy | communism | socialism | market socialism | laissez faire | free enterprise |


Or For A Little Background...

     | capital | ownership and control | factors of production | economy | economic system | private property | three questions of allocation |


And For Further Study...

     | invisible hand | liberal | conservative | economic goals | seven economic rules | four estates | distribution standards | government functions | opportunity cost | investment, production possibilities | American Enterprise Institute | Cato Institute |


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