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What is Capitalism? - Definition & Examples

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  • 0:01 Definition
  • 0:54 Taxation
  • 1:38 Examples
  • 2:50 Summary
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Lesson Transcript
Instructor
Tara Schofield

Tara has a PhD in Marketing & Management

Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

This lesson explains what capitalism is and gives several examples to help illustrate how capitalism is executed in the business world. After completion of the lesson, take the quiz to gauge your learning.

Definition of Capitalism

There are many different types of economic systems that regulate how people operate and profit from business, including capitalism, communism, and socialism. This lesson focuses on capitalism. Capitalism is an economic system in which the means of production of goods or services are privately owned and operated for a profit. In capitalism, individuals are given the freedom to operate their business as they want and manage their own income. Capitalism applies to every person who operates within this system; therefore, business owners and employees are equally represented within the capitalism model.

In terms of business operations, capitalism gives the most freedom and flexibility to owners. Beyond taxation and standard regulatory laws, the government does not control how the business is operated or how the income is used.

Taxation

In capitalism, there are taxes that must be paid. Taxes are a set rate and do not require a person to surrender their entire earnings to the government or other regulatory group. Capitalism offers the greatest level of control and freedom of all the economic systems. For example, in other economic systems, taxes may be 50% or more of profits. Under capitalism, taxes are calculated based on the form of business, such as sole proprietor, LLC, or corporation, and are based on revenues of the business. Because the tax rates are considerably less than other economic systems, the revenue remaining can still be a motivating factor for business owners to operate their companies.

Examples of Capitalism

Let's say you own a small farm that grows pumpkins. You determine the best way to sell pumpkins is to have an annual event and allow families to come enjoy a day on the farm, play games, and pick their own pumpkin. Because you are part of a capitalist society, you can offer these services, set the admission price, charge whatever you want for pumpkins, and keep the net profit.

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Additional Activities

Examples of Capitalism


For each of the examples below, determine whether or not capitalism is being described. Your answer should include a discussion about how the goods and services are being produced, ownership of the firms, the role of government, and the role of taxes. As is the case in most countries, an economy is typically not completely capitalist nor not capitalist in any aspect. Therefore, your answer could discuss ways that the example is describing capitalism and ways that it is not.

  • In Country A, all businesses are privately-owned and operated for-profit. Firms have complete control over pricing and output decisions, and the government stays out of the way. However, the businesses are forced to pay 20% of their net profits to the government via taxes.
  • In Country B, just as with Country A, all businesses are privately owned and operated in a for-profit manner. These firms also can determine what to produce and how much to produce. However, unlike Country A, the government determines the price that the firms will set for their products.
  • In Country C, all businesses are owned and operated by the government. Therefore, the government makes all price and output decisions and collects all of the profits earned by the business.
  • In Country D, some businesses are owned and run by private individuals, while others are run by the government. For the ones that are privately owned, however, they have complete control over price and output decisions and retail all of the profits (less taxes that need to be paid).

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