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Definition of Capitalism:

Capitalism is an economic system rooted in the private ownership of the means of production and distribution of goods and services.  Capitalism is normally associated with a market economy and relies on the profit motive.

Detailed Explanation:

Capitalism, socialism and communism define a government’s policy on ownership of a business. In other words, each term refers to a difference in who controls what is produced, who produces it, and how a good or service is distributed. Are all of a country’s businesses, including those vital to the country’s welfare, privately owned? Is the distribution of goods and services determined by the law of supply and demand? If so, then the government favors capitalism. Governments are more directly involved in these decisions in countries with socialist and communist economic systems.

Capitalists seek profits earned by the private owners of a company. Business owners make all of their economic decisions independently in the market place. Economists frequently describe capitalist economies as laissez-faire, French for “let things alone,” because there is minimal government intervention. 

Consumers and producers meet in the market. A market can be anywhere goods and information are traded, including, but not limited to open air markets, stores, the Internet, and exchanges. It is here consumers and producers “communicate” by purchasing and selling products or services. The buyer tells the producer that he (or she) approves of the product and price. Competition holds producers and consumers in check. If Producer A charges too high a price for a shirt, the consumer will choose to purchase a shirt manufactured by Producer B. Eventually, Producer A will reduce its price to meet its competition. Ultimately consumers and sellers reach an agreement not only on the shirt's price, but also, how many shirts should be produced, who produces the shirts, and how the shirts are distributed. In addition, businesses strive to produce efficiently because doing so minimizes their costs. Each privately owned company strives to have the optimum allocation of resources to produce the good or service it sells. Adam Smith referred to this as the "invisible hand" since each individual seeking to better themselves looks to provide something they can sell, and buyers are only willing to purchase goods or services that benefit them. Society benefits because efficient production minimizes waste. In other words, individuals acting in their own self-interest make the best decisions for society as a whole. Capitalists believe government should not interfere in economic matters.

Critics of capitalism believe wealth is too concentrated. Government should intervene in the interest of the general population to curb the power of capitalists. In truth, most "capitalist" economies are mixed economies. Government may subsidize, tax or regulate groups where it is considered in the best interest of society to do so.

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