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CHAPTER FOUR PURE CAPITALISM AND THE MARKET INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. List and explain six important characteristics of capitalism. 2. List three other characteristics of modern economies. 3. Solve a problem dealing with the principle of comparative advantage when given relevant information about production possibilities in two nations. 4. State the Five Fundamental Questions faced by any economic system. 5. Describe how the market system answers each of these five fundamental questions. 6. Differentiate between normal profits and economic profits. 7. Identify the relationship between profits and expanding industries. 8. Explain what is meant by “dollar votes.” 9. Explain how a market system achieves economic efficiency. 10. Describe the guiding function of prices. 11. Identify ways in which the market system promotes progress: technological improvements and capital accumulation. 12. Explain the “invisible hand” concept. 13. State three virtues of a market system. 14. Define and identify terms and concepts at the end of the chapter. LECTURE NOTES I. Basic Tenets of Capitalist Ideology: A. Private property exists and there is freedom to negotiate binding legal contracts. 1. People can obtain, control, use, and dispose of the property resources they own. 2. Private property is sustained by the right to bequeath and inherit. 3. Government does limit uses and control. B. Freedom of enterprise and choice exist. 1. Freedom of enterprise means individuals can become entrepreneurs. 2. Freedom of choice has several impacts: a. Workers can choose jobs or occupations. b. Consumers can buy what they want (and their choices influence what is produced, which is called consumer sovereignty). c. Owners of property and money resources can use resources as they choose. 43
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Pure Capitalism and the Market 3. Again there are government limitations on these choices. C. Self-interest is the driving force in capitalism . Entrepreneurs try to maximize profits or minimize losses; resource suppliers try to maximize income; consumers maximize satisfaction. D. Competition among buyers and sellers is a controlling mechanism. 1. Large numbers of sellers mean that no single producer or seller can affect price or market supply. 2. Similarly, large numbers of buyers are assumed. 3. Producers can enter or leave industry easily. E. Markets and prices coordinate economic activity.
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