Question

Which of the following is not a basic characteristic of capitalism? a. Economic decisions occur in markets. b. Factors of production are privately owned. c. Income is distributed on the basis of need. d. Businesses make their own product and price decisions.

Short answer

The incorrect statement that does not represent a basic characteristic of capitalism is c. "Income is distributed on the basis of need." In capitalism, income is generally based on the principle of fairness and individual work or contribution, not on the basis of need.

Step-by-step solution

Understand the properties of Capitalism

Capitalism, as an economic system, allows for the private ownership of goods and services, and businesses can freely compete in the market with fewer government interventions. The pricing of goods and services is determined by market competition.

Distinguish the Characteristics of Capitalism

In capitalism, income is generally based on the principle of fairness, i.e., you earn as per your work or contribution to the production process. It is not necessarily distributed on the basis of need as is more typical in a socialist system.

Identify the Incorrect Statement

Given this understanding, the options that represent the basic characteristics of capitalism are: Economic decisions occur in markets, Factors of production are privately owned and Businesses make their own product and price decisions. So the statement "Income is distributed on the basis of need" does not represent a basic characteristic of capitalism - this is more reflective of a socialist or a communist system rather than capitalism. Conclusion: Therefore, the answer is c. "Income is distributed on the basis of need", which is not a basic characteristic of capitalism.

Key concepts

Economic Systems

At the very heart of understanding human societies is the concept of economic systems. These are the frameworks that societies use to determine how to allocate resources and distribute goods and services among their population. The major types of economic systems include capitalism, socialism, and mixed economies. Each system has its unique way of addressing the key economic questions: 'What to produce?', 'How to produce?', and 'For whom to produce?'.

Capitalism emphasizes private ownership and market forces. Socialism leans towards state ownership and planned distribution, whereas mixed economies incorporate elements of both capitalism and socialism. It's important to recognize the subtleties of each system and how they impact daily life—ranging from the availability of products to job opportunities and even social welfare programs.

Private Ownership

A cornerstone of capitalism is the principle of private ownership. This means that individuals and businesses have the right to own property and assets, ranging from real estate to intellectual property. In the capitalist system, private ownership is key because it's believed to foster innovation and efficiency. Owners are motivated to improve their assets, create wealth, and contribute positively to the economy.

Underpinning this ownership is the legal system, which provides the framework to buy, sell, and inherit property. Notably, private ownership contrasts with systems like socialism, where resources and production means may be owned collectively or by the state, supposedly to ensure fairness and equality.

Market Competition

Market competition is the driving force that fuels innovation and leads to a variety of goods and services in capitalism. It implies a scenario where numerous businesses vie for customer attention and dollars. Healthy competition encourages firms to be more efficient, reduce prices, improve quality, and incessantly innovate. This is beneficial for consumers, who get to enjoy better products and services.

In a truly competitive market, no single entity has overarching control over the market price of goods and services; prices are determined by supply and demand dynamics. The ability for new businesses to enter the market, known as 'market entry,' is also critical to maintaining competition and preventing monopolies.

Income Distribution

In the context of capitalism, income distribution is predominantly influenced by the market forces of supply and demand for labor coupled with the individual contribution of labor or capital to the production process. Those with rare skills or significant capital often command higher incomes. This creates a wide range of incomes, from very low to extremely high, reflecting a variety of factors including education, experience, effort, and luck.

Unlike systems that allocate resources or income based on need or equality, capitalism relies on the notion that income should stem from one's economic contribution. This presumption supports the incentive structures crucial to capitalism, though it often leads to debates about the fairness and social implications of the resulting income inequality.