Sub: Economics Topic: Macro Economics
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Money in the capitalist economy
Capitalism or a free enterprise system is an economic system based on the concept of privateproperty, the right of ownership and use of wealth in order to earn income. From private propertycomes the institution of private enterprise or production by privately owned businesses. Firms arefree to hire, produce and price as they see fit. Furthermore, there is a private initiative to carry onproduction based on profit motive. There is perfect freedom of choice, enterprise and contract. A freeenterprise system is, thus, characterized by the very large number of decisions reached independentlyby the producers and consumers. Government activity is limited to a few spheres, such as nationaldefense and police protection, but in matters of production and pricing the government is expected totake a laissez-faire position and exert little or no control.The function of controlling the economy and coordinating the many independent decisions isachieved through the operation of a free price system. The force of competition is expected to be animportant factor in assuming the smooth and efficient functioning of the price system. Themechanism of prices determines and directs the flow of goods and services and helps in thedistribution of total output as income among individuals who participate in productions. Since pricesare expressed in money only, money becomes the life blood of a capitalist economy. The capitalisteconomy 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. Apartfrom 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 consumergoods; 3) the price of the goods and services which he actually purchases and 4) the prices of othergoods and services.