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    Political and economic freedom

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    1. Why is democracy associated with capitalism? Consider the impact of the capitalistic free market on the following:
    -The mobility of Capital and Labor
    -The affect of less government regulation which is characteristic of capitalism
    -The impact of the free market on the level of government ownership of firms.
    -The affect of government regulation on non-capitalistic nations.

    2. In contrast to a socialist economic organization, how would a capitalist system differ? Consider who owns the capital (means of production) in the two models.

    3. When do assumptions made in conjunction with economic theorizing have to be realistic? Can unrealistic assumptions provide useful outcomes?

    4. What basic principles does the production possibilities (or transformation) curve illustrate? Consider whether an increase in the production of one good requires an increase or decrease in the production of other goods when K and L are held constant.

    5. When does the concept of opportunity cost indicate? Consider how the production of one good affects the possible production level of other goods.

    6. Will a change in the price cause the demand for X, a normal good, to change?

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    Solution Preview

    1. Economic freedom tends to go hand in hand with other types of freedom. Totalitarian governments restrict intellectual freedom in order to maintain power. Political power often goes along with wealth, so the government needs to keep citizens from accumulating profits. They need the ability to control people's movement, and how money is spent. In doing this, they prevent the free market from working. Capital and labor are not free to move to the areas where they are most needed, creating inefficiency. When the government owns firms, it uses the resources for political purposes, rather than maximizing profit. Individuals are not allowed to accumulate wealth. The free market requires that workers and capital flow quickly to the areas where profits can be maximized. Government regulations can impede these transactions. Profits accumulate to those who can provide the necessary capital or labor. These profits can be used to influence the political system. Those who profit from the free market will want government interference to remain at a minimum. The government needs to work to protect property and to ...

    Solution Summary

    Correlation between capitalism and democracy; discussion of economic theorizing.