Capitalism 101

What is Capitalism?
Capitalism is often thought of as an
economic system in which private actors
own and control property in accord with
their interests, and demand and supply
freely set prices in markets in a way that
can serve the best interests of society.
To identify money-making opportunities,
you must first understand how wealth is created
(and sometimes destroyed).
• Key note: Wealth is created when assets are moved from
lower to higher-valued uses
• Definition: Value = willingness to pay
Desire + Income = You want something + you can pay for it
• Key note: Voluntary transactions, between individuals or
firms, create wealth.
• Meaning, people create wealth by pursuing self-interest.
Surplus
A surplus results from a
disconnect between supply and
demand for a product, or when
some people are willing to pay
more for a product than other
consumers. Typically, a surplus
causes a market disequilibrium
in the supply and demand of a
product.
The buyer and seller both benefit from this transaction:
• Buyer surplus = buyer’s value minus the price
$130,000 - $128,000 = $2,000 buyer surplus

• Seller surplus = the price minus the seller’s value

$128,000 - $120,000 = $8,000 seller surplus

• Total surplus = buyer + seller surplus = difference in

values
$2,000 + $8,000 = $10,000 → $130,000 - $120,000 = $10,000
$10,000 are the gains from trade
Wealth-Creating
Transactions
• Which assets do these transactions move to higher-
valued uses?
• Factory Owners • Corporate Raiders
• Real Estate Agents • Insurance
Salesman
• Investment Bankers
• Discussion: How does eBay create wealth?
• Discussion: Which individual has created the most
wealth during your lifetime?
• Discussion: How do you create wealth?