Capitalism

Capitalism is the political economic system based on private property and private profit. In this system, individuals and companies own and direct most of the resources used to produce goods and services. Such resources include land and other natural resources, labour, and capital. Capital includes factories, equipment, and money used in business activities. The term capitalism comes from capital.

Capitalism pressurises private economic choices. People are free to decide how they will earn and spend their income. Companies may choose which goods and services to produce and how much to charge for them. They also compete with one another to sell products. Major economies which are based on capitalism include the United States, Australia, the United Kingdom, France, Canada, Germany, Hong Kong, and Japan.

The government controls some aspects of the economy in every nation. But capitalism's emphasis on private economic decisions makes it different from the two other major economic systems--Communism and mixed economies. In Communist or centrally planned economy, the government owns or controls most of the resources used in production and develops national plans for their use. In a mixed economy, the government does some economic planning and controls some industries, but it also allows some individual choice.

Capitalism is sometimes called free enterprise or modified free enterprise because it permits people to engage in economic activities largely free from government control. Other names for capitalism include free market system, entrepreneurial system, and laissez faire.

How capitalism works

A number of factors influence economic decisions under capitalism. The most important factors are (1) individuals, (2) businesses, (3) the market, (4) income, and (5) the government.

Individuals influence the economy as consumers, workers, and investors. For example, if consumers show by their purchases that they prefer small cars to large cars, dealers will order more small cars and fewer large ones. Manufacturers, in turn, will step up production of small cars and cut production of large cars. Private investors provide much of the money that businesses need to grow. Businesses try to influence what consumers buy through advertising and by creating new and improved products.

The driving force of a capitalist economy is the desire for profits.The desire for profits, called the profit motive, ensures that companies produce the goods and services that consumers are willing and able to buy. To succeed, businesses must sell enough of their products at a price high