Capitalism: The Market Economy

Access: Public Peer Review

Start FlashCards Download PDF Learn

Get Jobilize Job Search Mobile App in your pocket Now!

Get it on Google Play Download on the App Store Now

Do you use facebook?

Photo of a smartphone with the Facebook application open
Economics is greatly impacted by how well information travels through society. Today, social media giants Twitter, Facebook, and Instagram are major forces on the information super highway. (Credit: Johan Larsson/Flickr)

Decisions ... decisions in the social media age

To post or not to post? Every day we are faced with a myriad of decisions, from what to have for breakfast, to which route to take to class, to the more complex—“Should I double major and add possibly another semester of study to my education?” Our response to these choices depends on the information we have available at any given moment; information economists call “imperfect” because we rarely have all the data we need to make perfect decisions. Despite the lack of perfect information, we still make hundreds of decisions a day.

And now, we have another avenue in which to gather information—social media. Outlets like Facebook and Twitter are altering the process by which we make choices, how we spend our time, which movies we see, which products we buy, and more. How many of you chose a university without checking out its Facebook page or Twitter stream first for information and feedback?

As you will see in this course, what happens in economics is affected by how well and how fast information is disseminated through a society, such as how quickly information travels through Facebook. “Economists love nothing better than when deep and liquid markets operate under conditions of perfect information,” says Jessica Irvine, National Economics Editor for News Corp Australia.

This leads us to the topic of this chapter, an introduction to the world of making decisions, processing information, and understanding behavior in markets —the world of economics. Each chapter in this book will start with a discussion about current (or sometimes past) events and revisit it at chapter’s end—to “bring home” the concepts in play.


In this chapter, you will learn about:

  • What Is Economics, and Why Is It Important?
  • Microeconomics and Macroeconomics
  • How Economists Use Theories and Models to Understand Economic Issues
  • How Economies Can Be Organized: An Overview of Economic Systems

What is economics and why should you spend your time learning it? After all, there are other disciplines you could be studying, and other ways you could be spending your time. As the Bring it Home feature just mentioned, making choices is at the heart of what economists study, and your decision to take this course is as much as economic decision as anything else.

Economics is probably not what you think. It is not primarily about money or finance. It is not primarily about business. It is not mathematics. What is it then? It is both a subject area and a way of viewing the world.

Part 2 of Lessons for the Young Economist

Lesson 05: The Institution of Private Property

Lesson 06: Direct Exchange and Barter Prices

Lesson 07: Indirect Exchange and the Appearance of Money

Lesson 08: The Division of Labor and Specialization

Lesson 09: Entrepreneurship and Competition

Lesson 10: Income, Saving , and Investment

Lesson 11: Supply and Demand

Lesson 12: Interest, Credit, and Debt

Lesson 13: Profit and Loss Accounting

Lesson 14: The Stock Market

Test PDF eBook: 
Capitalism: The Market Economy
Download Capitalism Economy Test PDF eBook
96 Pages
English US
Educational Materials

Sample Questions from the Capitalism: The Market Economy Test

Question: Why does economic scarcity lead to potential conflict in society?


Scarcity means that there aren't enough units of a good (or service) to satisfy everyone's potential uses for it. In society, people often have incompatible aims for the same unit of a good. (If Jim eats a piece of pizza, Sally can't eat the same piece.)

Question: How is it possible for both parties to benefit from the same exchange?


Economic value is subjective.

Question: Did Crusoe need an institution of private property?


No, the only conflict Crusoe had was with Nature. If he wanted more coconuts to eat, he simply had to decide whether the benefits outweighed the additional sacrifice of leisure. There were no other intelligences who may have had their own designs on the scarce goods.

Question: Explain how property rights minimize conflicts.


Resources are scarce, meaning that there aren't enough to satisfy everyone's desires for using those resources. This situation leads to conflict, because if one person uses a good to satisfy his goals, someone else won't be able to. Property rights provide an orderly way to determine which person gets to decide how a good will be used, and how that ownership can be transferred to a different person. Sample Partial Credit Answer Without property rights, people would always fight over resources.

Question: If a producer good only provides benefits indirectly, can a producer good be obtained via direct exchange?


Yes. The text discusses the example of a farmer trading away bacon for tomato seeds, which are presumably a producer good (intended for planting to yield tomatoes). So long as both farmers intend on using the obtained goods themselves (rather than trading them away yet again), the exchange is a direct one. (The distinction between direct and indirect exchange will be much clearer after you work through Lesson 7.)

Question: What does it mean when an economist says, "We should let the market decide"?


Such a statement means that the government should not interfere with the outcome of voluntary interactions among private property owners. It's important for students to realize that letting "the market" decide something isn't ceding decisionmaking authority away from concerned individuals and into the hands of a lifeless concept. On the contrary, "the market" in this context refers to the decisions made by certain individuals in the private sector, and any government involvement would simply substitute the desires of government officials for the people in the private sector. Decisions are always made by individuals.

Question: Explain why the boundaries imposed by property ownership are absolutely essential to a capitalist system.


Capitalism gives people the freedom to start any business or to work for any employer that they desire. Consumers are also free to buy or not buy whatever products and services they desire. The only way this system can work is if there are strict boundaries on who owns what, so that it is clear which person has the right to use or trade away a particular good. Sample Partial Credit Answer If people didn't get to keep the fruits of their labor, they would have no reason to work hard.

Question: If Alice likes Snickers more than Milky Ways, does that mean she would always choose a Snickers over a Milky Way, if offered a choice between one or the other?


No, because she might start out with more Snickers than Milky Ways. For example, if Alice starts out with (2 Snickers and 0 Milky Ways), she would rather obtain one additional Milky Way than one additional Snickers. The former gift would raise her to the 14th spot on her preference ranking, whereas the latter would raise her only to the 19th. (She would start at the 21st spot.) Note that in a sense, it's inaccurate to say "Alice likes Snickers more than Milky Ways" for this very reason, but of course in everyday language we speak like this all the time.

Question: What are the three main institutional settings we will study in this course?


Pure capitalism, pure socialism, and the mixed economy (as defined in the student text and also above).

Question: Suppose the economy has only four goods: apples, oranges, bananas, and grapes. In barter, how many independent price ratios would exist? (E.g., the apple:orange ratio would not be independent of the orange:apple ratio.)


There are 4x3=12 different pairs of goods, but only 6 if the order is unimportant. So in a barter economy with four goods, traders would need to keep track of 6 different price ratios. Specifically, they are: apples:oranges, apples:bananas, apples:grapes, oranges:bananas, oranges:grapes, and bananas:grapes. (If you know that 1 apple trades for 2 bananas, then you automatically know that 1 banana trades for half an apple. That's why you only need to keep track of 6 total exchange ratios in this small economy.)

Question: Is the sketch of a pure market economy a realistic depiction of the United States?


Not at all! Historically, the United States was the closest to a large, pure capitalist economy the world has ever known, but the U.S. federal government has grown steadily since its birth. Even though many people consider the United States in the early 21st century to be an illustration of the operation of capitalism, in our terminology it is most definitely a mixed economy.

Start FlashCards Download PDF Learn
Source:  Dr. Robert P. Murphy, Lessons for the Young Economist. (Mises Institute), (Accessed 04 April, 2014). License: Creative Commons BY
Jordon Humphreys
Start Quiz
Copy and paste the following HTML code into your website or blog.
<iframe src="" width="600" height="600" frameborder="0" marginwidth="0" marginheight="0" scrolling="yes" style="border:1px solid #CCC; border-width:1px 1px 0; margin-bottom:5px" allowfullscreen webkitallowfullscreen mozallowfullscreen> </iframe>