Capitalism is a free enterprise system based on the concept of private property, the right of ownership and use of income and to earn income. Firms are free to hire, produce and price as they like. There is a private initiative to carry on production based on profit motive. In the absence of profit motive, economic activities may either slow down or else come to a grinding halt.

As the economy is based on free private enterprise and the government does not interfere this type of system is also known as a market economy or market system or laissez faire system.

The capitalistic economy system like every other system, has to face the problems of scarcity and choice then, how does it solve this problem? In this system the various problems are solved with the help what we call the price mechanism.

The following discussion substantiates it:

(1) What to produce and how much to produce: the central problem of what to produce is solved with the help of price mechanism in a capitalist economy. As a matter of fact sellers produce those goods and services which are demanded by the consumers. Consumers express their wants by demanding a given quantity of goods at its given price. A producer attracted by the profit motive. A producer will produce only that commodity for which there isdemand. He can get good price and earn profit by producing in accordance with the choice or demand of the consumers. The consumer will pay higher price for those commodities will be produced for which the consumers are willing to pay higher price.

for example, in recent year in India the electronics industry has suddenly found it market booming, and transistors have faded into the background because the demand for electronics goods has decreased. So the electronic industry has responded by the mobilising resources for investing in the production of TVs, VCRs and Video recorded movies. Thus, resources have automatically responded by moving into the types of production the people wanted.

In this way price mechanism not only determines what to produce, it also determines how much to produce. Higher prices of the products encourage the producers to produce more. Higher prices are indicative of stronger preference for the product on the part of consumers. On the contrary lower prices of the product reflect lower preference of the consumers and so serve as disincentive to the producers, so they reduce the production of their product.

(2) for whom to produce: the problem for whom to produce is also solved by the price mechanism. The simple market rule is produce for those who have ability and willingness to pay. Ability to pay depends on income. Income on which effective demand depends is only another name for prices. For instance a person may get his income by way of wages or interest or profit or rent. Interest is the price for the service of the capital, wage is the price for the use of labour, rent is the price for the use of land. Price or income of different factors of production is determined by theirsupply then it will command high price or income. Such a factor will able to demand more goods by virtue of it high income and producers will produce more for him. On the contrary, if the demand for a factor is less than its supply then it will command less price or income. The owner of the factor will be able to buy less goods and producers will also produce less for him. Thus this problem is also solved through price mechamism.

Services:- Capitalism Problems Homework | Capitalism Problems Homework Help | Capitalism Problems Homework Help Services | Live Capitalism Problems Homework Help | Capitalism Problems Homework Tutors | Online Capitalism Problems Homework Help | Capitalism Problems Tutors | Online Capitalism Problems Tutors | Capitalism Problems Homework Services | Capitalism Problems