Capitalism Basics
In capitalism, who owns businesses; government or individuals?
Individuals
Who wrote The Wealth of Nations?
Adam Smith
Which system supports free markets; capitalism or mercantilism?
Capitalism
When prices increase, what do producers do?
Supply more.
Define shortage.
Demand exceeds supply at a certain price.
What is capitalism?
An economic system based on private ownership and free markets.
What is the “Invisible Hand”?
The idea that markets regulate themselves through supply and demand.
Which system involves strong government control of trade?
Mercantilism
When prices decrease, what do consumers do?
Buy more.
Define surplus.
Supply exceeds demand at a certain price.
If a company keeps losing customers and money, what will likely happen in a capitalist system?
It will go out of business
What is laissez-faire economics?
Minimal government interference in business.
State the major difference between capitalism and mercantilism.
Capitalism allows private ownership and competition; mercantilism involves government-controlled trade.
What is equilibrium price?
The price where supply equals demand.
If stores have too many unsold shoes, what should they do?
Lower prices or reduce production.
Why does competition usually lower prices and improve quality?
Businesses compete for customers, so they improve products and lower prices to attract buyers.
How does the Invisible Hand connect to supply and demand?
Prices adjust based on consumer demand and producer supply without government control.
Why did increased global trade help capitalism grow in Europe?
It expanded markets, increased wealth, and encouraged private enterprise.
If a product is priced below equilibrium, what happens and why?
Shortage, because demand exceeds supply.
Why does a shortage cause prices to rise in a free market?
Consumers compete to buy limited goods, pushing prices up.
Explain how profit motivates innovation in capitalism.
Profit rewards success; companies create new products to earn more money (ex: new technology, faster phones, better streaming services).
If a government heavily regulates prices, how might that interfere with the Invisible Hand?
It prevents natural price adjustments, which can cause shortages or surpluses.
How did the Columbian Exchange contribute to the rise of capitalism?
It increased the money supply, expanded trade networks, and created new markets that encouraged private enterprise and competition.
Walk through what happens step-by-step when demand suddenly increases for a product.
Shortage occurs → prices rise → producers increase supply → market moves back toward equilibrium.
A government sets a price ceiling below equilibrium on rent. Predict what will happen and explain why.
Shortage of housing; more people want apartments at lower price than landlords are willing to supply.