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The capitalist system is one characterized by the private ownership of the means of production, individual decision making, and the use of the market mechanism to carry out the decision of individual participants and facilitate the flow of goods and services in markets.
In a capitalist’s economy, households and firms are the basic production units. Each individual household is the owner of productive factor. These factors include the household’s own labour and may also include land, capital and raw materials. Each household sells the services of its factors to the basic production unit, the firm. Private firms, organized by individuals, combine these production factors to produce goods. The difference between revenues and cost constitute profits, which then form the income of the firm’s organizers. The income it to purchase the finished products of the firms.

The capital system is also known as free enterprise economy and market economy. Two types of capitalism may be distinguished, viz…,

(i) The old, laisssez-fair capitalism, where government intervention in the economy is absent or negligible; and

(ii) The modern, regulated or mixed capitalism, where there is a substantial amount of government intervention.


The principal characteristics of a “Pure” capitalist system are:

(i) Private Ownership:

In a capitalist economy, the factors of production-land, labor and capital – are privately owned, and production occurs at private initiative. Individuals have their property as they like as long as they do not infringe on the legal property rights of others. Private property, however, is protected, controlled and enforced by law.

(ii) Free Enterprise:

Free enterprise, an essential feature of the capitalist system, is merely an extension of the concept of property rights. The term free enterprises implies that private firms are allowed to obtain resources, to organize production and to sell the resultant product in any way they choose.

(iii) Consumer’s Sovereignty:

Consumer’s sovereignty is at its best in the capitalist system where consumers have complete freedom of choice of consumption. The production decisions in the free market economy are based on the consumer desires which are reflected in the demand pattern.

(iv) Freedom of Choice of Occupation:

In a capitalist economy, the individual is free to choose any occupation his is qualified for. This freedom of choice enables the workers to make the best possible barging for his labor. This implies that the employers have to competitively bid for labour, Freedom of occupational choice, however, does not mean guarantee of the job a worker opt for; the choice is practically limited by the extend of availability of the jobs.

(v) Freedom of Save and Invest.

The freedom to save is implied in the freedom of consumption, for saving depends on income and consumption. The term saving implies the sacrifice of consumption. The freedom to save, inherit and accumulate wealth is, therefore, a right which is perhaps more typical for the private enterprise system that the free choice of consumption and occupation.

(vi) The Market System:

The market mechanism is the key factor that regulated the capitalist economy. A market economy is one in which buyers and sellers express their opinions about how much they are willing to pay for or how much they demand of goods and services. Prices guide the purchase – decisions of the customers. At the same time, while they decide to buy or not to buy a product, consumers vote for and against the product by using their money. Thus, market prices, which reflect the desire of millions of consumers, provide guidance to investors and other business persons. The market system, also called the price system, may, therefore, be regarded as the organizing force in a capitalist economy.

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