Page 75 - Business Principles and Management

Unit 1

3.3 Fundamentals of Capitalism

Goals Terms
• Describe why private property is • private property • supply
important to capitalism. • profit • competition
• Describe how prices are set in • demand
a capitalistic system.

ome economic-political systems either do not permit ownership of property
(communism) or may impose limitations on ownership (socialism). One of the
Sbasic features of capitalism is the right to private property, a right reserved to
the people by the Constitution. Other features include the right of each business
to make a profit, to set its own prices, to compete, and to determine the wages
paid to workers.

Private Property

The principle of private property is essential to our capitalistic system. Private
property consists of items of value that individuals have the right to own, use,
and sell. Thus, individuals can control productive resources. They can own land,
hire labor, and own capital goods. They can use these resources to produce goods
and services. Also, individuals own the products made from their use of land,
labor, and capital goods. Thus, the company that produces furniture owns the
furniture it makes. The furniture company may sell its furniture, and it owns
the money received from the buyer. The Gonzales family owns its store, the
farm it purchased, and the food it produces and buys before selling it. And the
family is entitled to make and keep its profits.

PROFIT

In a capitalist system, the incentive as well as the reward for producing goods and
services is profit, which is computed by subtracting the total costs of producing
the products from the total received from customers who buy them. The company
making furniture, for example, has costs for land, labor, capital goods, and mate-
rials. Profit is what the furniture company has left after subtracting these costs
from the amount received from selling its furniture.
The profit earned by a business is often overestimated by society. The average
profit is about 5 percent of total receipts while the remainder, 95 percent, repre-
sents costs. Consider a motel with yearly receipts of $500,000. If the profit
amounts to 5 percent, then the owner earns $25,000; that is, $500,000 times
0.05. Costs for the year are 0.95 times $500,000, or $475,000. Some types of
businesses have higher average profit percentages, but many have lower ones or
even losses. Owners, of course, try to earn a profit percentage that is better than
average.

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