Introduction to Business Economics

Capitalist Economy


You must have heard criticism about extreme capitalism in recent times. But what exactly does capitalism mean? And what are the characteristics and advantages of a capitalist economy? Let us learn about these concepts.

Capitalist Economy

Capitalism is the most prominent in our current global economic system. Its main characteristic is that it most means of production and property are privately owned by individuals and companies. The government has a limited role in such an economy limited to management and control measures.

So a capitalist economy is a liberal economy. This means only the free market will determine the supply, demand, and prices of the products. There is no direct government intervention other than to control monopolistic practices in the economy.

As we said earlier a capitalist economy is the most predominant in the current global economy. USA, UK, Germany, Japan, Singapore all are classic examples of capitalist economies.

Capitalist Economy

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Features of a Capitalist Economy

  • Right to Private Property: This is the essence of capitalism. This right means that private property such as property, factories, machines, plants etc. can be owned under private individuals and companies. The three things covered under this right are:
    Every individual can acquire any amount of property, He can use these properties as he wishes, He also has the right of inheritance. So he can inherit the property from his forefathers. And he can also pass it on to his successors on his death.
  • Price Mechanism: Price mechanism is like an invisible hand that controls the workings of a capitalist economy. The forces of supply and demand will determine the prices and the level of productions in the economy. The government will not have any interference in this matter.
  • Profit Motive: The driving force behind any capitalist economy is the profit motive. All companies wish to produce and sell their products to maximize their profits. This also induces healthy competition in the economy.
  • Freedom of Enterprise: In capitalism, every individual is free to make his own economic choices without any intervention. This includes both the consumer and the producers.
    So a producer is free to produce any goods or services. And the consumer is free to buy whatever he desires and from whomever, he wants without restrictions.

Merits of a Capitalist Economy

  1. The producers are more incentivized to produce their best goods and services due to the feature of the profit motive and the ability to hold private property.
  2. The economic growth of an economy is also faster and higher in a capitalist economy. This is because the investors will also invest in projects that are profitable for them. There is no pressure to produce any goods or services if they do not wish to do so for the sake of the public.
  3. Since all resources and factors of production are under private ownership they are used in the most productive manner. This results in optimum utilization of resources,
  4. Consumers also benefit in a capitalist economy. Firstly they have the freedom to choose whichever products or services they wish to buy. Also, the competition is high and the producers are motivated to make their best products in large quantities at reasonable prices.
  5. Capitalism also promotes fundamental rights of freedom and choice for both the consumer and the producers
  6. In a capitalist economy, there is an incentive for technological and R&D development.
  7. We can expect a higher degree of efficiency and innovation in a capitalist economy than any other economy.

Solved Question on Capitalist Economy

Q: Describe certain disadvantages of a capitalist economy.

Ans: There are some distinct demerits of a capitalist economy, some of which are

  • Can cause a great economic inequality which can lead to social injustice. In a capitalist economy, the gap between the rich and the poor just gets bigger.
  • Property rights are given precedence over the rights and the well beings of humans
  • There can be a misallocation of resources. This can lead to higher production of luxury goods which will, in turn, make the necessities even more expensive and out of reach for a part of the population.
  • Firms tend to spend large amounts on promotion and selling expenses. This is a waste of valuable resources.
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