Alyssa Joy T.

Deseo
BSA II

Managerial Economics

CAPITALISM AND WEALTH

Capitalism
an economic system based on the private ownership goods and services. Characterized by a free
competitive market and motivation by profit. In other words, an economic system in which money is
used to make more money.

The chief virtue of a capitalist mode of production is its ability to create wealth.
WEALTH

Created when asset move from lower to higher-valued uses.

Value is defined as the amount of money that an individual is willing to pay for a
good.
The biggest advantage of capitalism is that it creates wealth by letting a person follow his or her self-
interests. P

A buyer willingly buys if the price is below his value, and a seller sells for the same selfish reason-
because the price is above her value. Both buyer and seller gain; otherwise, they would not transact.

Voluntary transactions create wealth.

*Supposed that buyer values a house at $240,000 and a seller at $200,000. If they can agree on a
price-say, $210,000-they both gain. In this case, the seller gets to sell at a price that is $10,000
higher than her bottom line and the buyer gets to buy at a price that is $30,000 below her top dollar.

Seller Surplus- the difference between the agreed-on price and the seller’s value.

Buyer Surplus- buyer’s value minus the price.

Total surplus or gains from the trade- the sum of buyer and seller surplus.

Examples of wealth creating, voluntary transactions

1. Corporate raiders move companies from a lower valued use (under current management) to
higher valued uses (broken up and sold to other companies).
2. Real estate agents bring buyers and sellers together and are paid out of the surplus created
when a house is moved from a seller to a buyer. Likewise, taxes are collected out of the surplus
created by the transaction.
3. Factory owners purchase labor and capital from their owners and sell their product to
consumers. In essence, they are intermediaries who move labor and capital from lower valued
uses to higher valued uses as determined by consumers willingness to pay for the product of the
factory.
Alyssa Joy T. Deseo
BSA II

4. Like real estate agents, stock brokers bring investors, who want to invest money, together with
entrepreneurs, who want to use the money. The brokers are paid out of the resulting surplus.

Zero Sum Fallacy- critics think that if one person makes money, someone else must be
losing it.

DOES THE GOVERNMENT CREATE WEALTH?