Money in the Capitalist Economy

Topics: Capitalism, Property, Free market Pages: 2 (420 words) Published: April 29, 2013
Capitalism or a free enterprise system is an economic system based on the concept of private property, the right of ownership and use of wealth in order to earn income. From private property comes the institution of private enterprise or production by privately owned businesses. Firms are free to hire, produce and price as they see fit. Furthermore, there is a private initiative to carry on production based on profit motive. There is perfect freedom of choice, enterprise and contract. A free enterprise system is, thus, characterized by the very large number of decisions reached independently by the producers and consumers. Government activity is limited to a few spheres, such as national defense and police protection, but in matters of production and pricing the government is expected to take a laissez-faire position and exert little or no control. The function of controlling the economy and coordinating the many independent decisions is achieved through the operation of a free price system. The force of competition is expected to be an important factor in assuming the smooth and efficient functioning of the price system. The mechanism of prices determines and directs the flow of goods and services and helps in the distribution of total output as income among individuals who participate in productions. Since prices are expressed in money only, money becomes the life blood of a capitalist economy. The capitalist economy clusters round the pivot of money. In a capitalist economy, the consumer is free to choose what goods to buy and how much to buy. Normally he will choose those products which yield the greatest utility relative to their price. Apart from the consumer's individual tastes and circumstances, his choice of purchases will depend upon 1) his total money income; 2) the part of his money income which he prefers to spend on consumer goods; 3) the price of the goods and services which he actually purchases and 4) the prices of other goods and services. The...
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