Fundamental Principles & Characteristics of the U.S. Economy

Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

The United States is a capitalist economy that rests on pillars, or basic principles. This lesson will explore five of those principles and show them at work in simple examples.


The United States is a capitalist economy. I'm sure you've heard that before, but you might wonder just what capitalism is. Well, it's the economic system that goes the best with our democratic form of government, for starters. It allows anyone selling a legal product to start a business and keep the profits. People who start businesses are entrepreneurs and free enterprise allows them to do just that - start businesses. So, what are the other features of a capitalist economy that make it different from other types of economies? Let's have a look at five of the pillars, or guiding principles, on which our capitalist system rests.

Freedom of Choice

The consumer is king in the US economy. Hey, that's us, right?! So how do we rule? Well, you (and everyone else who lives here) are free to spend your money any way you choose, as long as what you spend it on is legal. You can buy any electronics or clothing your heart desires. You can go to all the ballgames and concerts you want, at least until your money runs out!

Some Americans like to shop until they drop!
Mall 3

This notion of consumer sovereignty is central to our capitalist system because the companies that make the electronics and the clothing will only make what they think we will willingly buy. No central authority or government tells these companies what to make or how many to make. They make as many as they choose and they only make what they think we will buy. So, in a roundabout way, we consumers decide what gets produced. That is how consumers rule!

Open Markets

Our economy is one of the most open economies in the world, and it thrives on competition. If you think that you can bake better cupcakes at a lower price than the bakery in your neighborhood, you are free to open your own bakery and compete with the other bakery for the neighborhood's cupcake business! And that isn't just for baked goods, it's for everything you can think of. New businesses open every day, and some will grow into large corporations someday if they are making what we consumers want to buy.

Our economy is also open to competitors from other countries. Anyone in the world is generally free to sell legal products and services in the United States. That makes it possible for us consumers to have the largest assortment of goods and services in the world available in our stores and online. Conversely, American companies can and do sell their products worldwide. Our economy is truly open to the widest form of competition, and that will drive down prices. We all benefit by getting a wide selection of goods and services at the lowest prices.

Free Markets

This competition, along with our free choice to buy what we want, determines what the prices of things are. Prices are not set by any government or central authority; they are set by supply and demand. When smartphones first came out, everyone wanted one. That raised the demand for smartphones and the price for them went up. Once new competitors entered the field and increased the supply of phones, prices fell. We consumers interact with businesses in the free market to set the prices for things. It's very central to our capitalist system that prices be set by the market.

Property Rights

A home of your own is a traditional American dream.
House 3

Land and what is built on top of it is owned by individuals and businesses in the United States. That is an important distinction from command economies, such as Cuba and North Korea, where the government owns the land and decides what to do with it. Here, anyone with the money can buy a parcel of land, build a home on it and own the place where he or she lives! We have legal and court systems that assure that once you buy that land and properly record the deed, no one can throw you off of it. Businesses are free to buy land too, and set up factories and stores to build and sell us the products that we want to buy.

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