Chapter 2.2, Problem 1R

Solution

To define: The concept of capitalism, laissez-faire, competition, free-enterprise system, profit, profit incentive, private property.

Capitalism: Capitalism is an economic system where there are private individuals who owns the factor of production to earn profits. In a pure capitalism, there is no government interference and businesses and people make their own decisions.

Laissez-faire: Laissez-faire is a French term which means "leaves alone”. It is an economic system in which there is less government intervention in the economy. The purpose of a laissez-faire economy is to promote free and competitive market.

Free-enterprise system: Free enterprise is defined as the system in which individuals are free to own and control the factor of production and make decisions of how to use those factor of production within the legal limits.

Profit: When a person invests money in a business, the motive of the businessman is to earn profits. Profits are basically the amount earned by subtracting cost incurred in producing a good from its revenue.

Profit incentive: Profit incentive is defined as the wish to make profits. It motivates the sellers to produce more goods and services in the market so as to earn more and more profits.

Competition: Competition is defined as the rivalry among the producers to produce similar goods with low price and better quality. There should not be barriers to entry and exit in the market for the competition to stay. There should be large number of independent sellers in the market. Competition leads to the efficient use of resources. There are large number of sellers in the market, they keep their prices low so as to get more buyers and able to earn more profits.

Private property: Private property is defined as the ownership which is owned by the individuals not by the state or government bodies. Individuals are free to do whatever they want to do with whatever they have whether it is funds, land , business or anything.