Capitalism is an economic system based on the private ownership of the means of production and their operation for profit
You can say that something has private ownership if its owner it’s not the state or a governmental institution.
Example: Google’s institutions are private.
In a business money comes and goes. The money that comes is called income the money that goes is called expenses. The profit is the money that remain from income after you take away the expenses.
The fundamental characteristics of capitalism involve:
Exchange means you give something you receive something back. To do this a capitalist system is using a price system that is usually expressed in money. This means that if you want to buy something it will cost you x monetary units.
Example: if you want to buy a bottle of water you will pay 1 Euro.
This is one of the most known characteristic of capitalism. There is a conflict between a consumer and a business: the consumer wants the products on a price that is as low as possible and the business needs to create a profit as big as possible. To solve this conflict capitalism is based on the rules of demand and supply. When something is in low demand but high supply the price goes down. When something is in high demand but low supply the price goes up. When both are the same the price is stable. This is happening because capitalism has at it’s base competition. When there is a high supply on the market, meaning that many businesses, also called players, are offering the same thing the price goes down so people will buy from them not from the competition. When the demand is high, meaning that many people want the same thing, the price goes up because of two things: to discourage the demand, because resources are limited, and to create a bigger profit.
Example: At the start of the computer era, computers were expensive because there was a high demand and a low supply. Now that the supply is higher and because the pieces are lower on price, thanks to the competition, computers are less expensive.
The highs and lows are relative to the market.
Example: To pay 200 euro for a bread is way too much but to pay 200 euro for a laptop it’s a very good deal.
In a capitalist system the market will want to be as free as possible. In theory this may sound good, but there are some problems, like the fact that the resources are limited or that some people may abuse the free market and to use noncompetitive behavior and to buy other things to create a monopoly.
To protect the free market there needs to be some rules so it can be kept alive. States usually come with laws and taxes to discourage a behavior.
Example: anti-trust laws to discourage noncompetitive behavior; environment taxes to prevent destruction of nature.
In a capital system when you are working, meaning that you are giving someone some services, you usually receive something called wage. This is an exchange between you and the employer. Usually a wage consists of money. The rules of free market apply here too in function of skill.
Example: Programming is a skill in high demand and low supply so it’s better payed than data entry.
This is the main engine of capitalism: to accumulate as much capital as possible. To do this a business can do two things: can lower the expenses or it can try to bring up the income. To lower the expenses, a business can try to cut the wages or to come up with a better strategy to provide a product, like using another material or to change the system of production to be more efficient. To bring up the income, a business can try to increase the price of the products. To increase the price a business can try to change it’s product quality so clients will pay more for it. If a business will simply increase the price of the product and there is not sufficient demand, the business will start losing money.
This is another driver fot capitalism. The market is free, so anyone can make the same business, so one needs to make its product more appealing. This is done by either creating a better product or by offering something else, like validation from a brand. This is why in a capitalist system things usually move up fast. A business needs to be better than its competitors so it can get a bigger profit.
Example: Intel and AMD are in a continuous competition, so their products are better by each year.
In a capitalist system the classes are usually divided by the amount of capital. There are 3 main classes:
This classes are relative to the group one reports to.
Example: if you are rich in a poor country you may be poor in a rich country.
In a capitalist system, because the market is fluid, so are the classes. One can move up and down always by its decisions.
Example: if you are low class but you make good decisions you may become middle or high class; if you are born rich but make bad decisions you can end up middle class or poor.
This is the reason why capitalist is often seen as a system that promotes equality not equity and equality of opportunity not equality of the outcome.
Example: you can make business but it’s not assured that it will succeed