Explain basic economic concepts and principles relative to capitalism.

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mkoren eNotes educator| Certified Educator

In a capitalist economy, supply and demand are key economic concepts. There also is a belief that government should have a limited role in the economy.

Supply and demand determine what happens in the economy. The price of a good is set when supply equals demand. If the price is too low, the supplier will miss an opportunity to maximize profits. If the price is too high, the supplier will not sell many products. Profit is maximized when supply equals demand.

In a capitalist economy, the government has a limited role. Some people believe the government should have a hands-off policy and allow businesses to make decisions with limited government involvement in the economy. This principle, known as laissez-faire, allows entrepreneurs to make most of the decisions about how to use resources, what products to make, and how many of those products should be made. Private citizens generally decide how resources will be used. Market forces, not government interference, influence many decisions in a capitalist economy.

In a capitalist economy, private citizens must make decisions regarding how to use scarce resources. There is an opportunity cost when a decision is made to use scarce resources in a certain manner. Generally, people make decisions regarding how to use scarce resources by looking at what will lead to the most desirable outcomes.