Capitalism, planned economies and the concept of supply and demand

Résumé du document

Capitalism is characterized by a private enterprise system contrary to a planned economy which is based on the collective or governmental ownership by the means of production, that is to say that all the enterprises in the country are public. Capitalism is theoretically based on a pure and perfect competition whereas in a planned economy there is no competition because enterprises are monopolistic, since owned by the state. In a capitalist scheme, businesses make investments expecting profits.

Extraits

[...] In a capitalist economy prices are free, determined by the supply and the demand which leads to the determination of an equilibrium price. Adam Smith talks about an “invisible hand” which would lead to equilibrium between supply and demand. It means that the government intervention would be totally unnecessary in a capitalistic economy. In a planned economy the supply of goods is also usually determined by official institutions like in the USSR where the production was in accordance to 5 years-plans determined by the government. [...]

[...] For example the government can favor a way of producing which is not the most efficient one by taking into account other considerations. We can define four levels of competition: the first one is a pure competition which is theoretically the basis for capitalism, as defined by Adam Smith. In some ways competition can lead to monopolistic competition. Planned economy is much more characterized by the two other levels: oligopoly and monopoly because enterprises are state owned. Socialism and communism are two different levels of planned economies. [...]

[...] We can determine a demand curve which shows the amount of goods people are going to buy according to its price. Generally the demand curve slopes downwards because people are less willing to buy when the goods are more expensive: the more expensive the prices, the lower the demand. We can also draw a supply curve which shows the relationship between different prices and the quantities that sellers will offer for sale. It generally slopes upward because the higher is the price, the more willing are the suppliers. [...]

[...] In some point supply and demand meet, this defines the equilibrium price. According to the classic economic theory all the prices are consequently “auto-driven” to the right price which can satisfies both the demand and the supply: price equalizes the quantity demanded by consumers, and the quantity supplied by producers. That is to say in any case buyers and sellers make choices that restore the equilibrium price. However this is the theory of market in the capitalist scheme, there are often many obstacles to that which leads to deficiencies of the market and implies a necessary intervention of the government by the setting of some taxes for example. [...]