Economic system- Capitalistic economic system

 

Learning Contents:

·         Economy, economic activities, and economic system

·         Characteristics, Merits, and Demerits of Capitalistic Economic system

·         Solutions of Central Problems of  Capitalistic Economic system

Economy

An economy is a system that provides living to the people. For this objective to be fulfilled it is necessary that every economy should undertake certain economic activities. These economic activities are known as essentials or vital process of an economy. In other words, “Economy is the total of all economic activities that enable people to earn their livelihood”.

Economic activity

Economic activity is the activity of making, providing, purchasing or selling goods or services. Any action that involves producing, distributing, or consuming products or services is an economic activity.

Economic activities are performed with the purpose of making profit, creating wealth, and producing items that can be offered to the public for sale. One of the main aims of economic activity is to produce goods and services to make them available to consumers. Put simply; economic activities are those which we undertake to earn income, money, or wealth.

Economic System

The structure of the economy is very complex. It includes all production of goods and services, all buying and selling, all employment, etc. The economic life of every individual is interrelated, at least to a small extent, with the economic lives of thousands or even millions of other individuals. Who organizes and coordinates this system? Who ensures that? For example, the number of smartphones a society produces is the same as the amount it needs and wants? Who makes sure that the right number of employees works in the electronics industry? Who makes sure that televisions are produced in the best way possible? How does it all get done? The answer to these important questions depends on the kind of economic system a society uses.

Economic system refers to the mode of production, exchange, distribution of goods and services in a society. In the modern world, today there is a range of economic systems, from market economies to planned (or command) economies and to a mixed economy.

 

Capitalistic Economy / Market Economy/ Free Economy

A market is any situation that brings together buyers and sellers of goods or services. Buyers and sellers can be either individuals or businesses. In a market economy, economic decision-making happens through markets.

Market economies are based on the private enterprise: the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals. Businesses supply goods and services based on demand. Which goods and services are supplied depends on what products businesses think will bring them the most profit. The more a product is demanded by consumers or other businesses, the higher the price businesses can charge, and so the more of the product will be supplied. It is also called a free market. Decisions about what products and services to be produced and at what prices to be fixed decided by the market forces of demand and supply. It is also called the competitive market where there is a large number of buyers and sellers so that no one can control the market price. The government does not interfere with the decisions of the households and the producers.

       

Characteristics of Capitalistic Economy

The following points highlight the different characteristics of a capitalistic economy:

1.      Private ownership:  In the market economy, the factors of production such as land, labor, capital, etc. can be owned by any individual who has the right to acquire, use, control, and dispose them in any way.

2.       Freedom of enterprise: Everybody is free to engage in whatever economic activity that they like to do. In other words, an individual can choose whatever occupation or business he likes to perform.

3.      Freedom of choice by consumers: People are free to spend their income, as they want. People have the freedom to buy or not to buy the goods and services offered in the marketplace. Consumers buy those goods and services that offer them maximum satisfaction on the basis of their tastes and preferences.

4.      Profit motive: Producers are motivated to produce those goods and services that offer them maximum profit.

5.      Price mechanism: Prices of goods and services are decided by the market forces of demand and supply. The price of a good is decided at the point where demand is equal to the supply. The government does not interfere with the free play of the market forces of demand and supply. It focuses largely on the maintenance of law, order, and defense of the country.

6.      Competition: Competition exists among sellers and producers of similar goods in the form of advertisement, price-cutting, and discount, etc.

7.      Inequalities of Income: There is widespread inequality prevalent in this economy and a wide gap between rich and poor mainly arises due to unequal distribution of property. It is a disadvantage to this economy.

 

Solution of Central Problems of Capitalistic Economy

The main objective of a capitalistic economy is to earn maximum profits. The central problems like what to produce, how to produce, for whom to produce are answered by private firms. The decisions are taken on the basis of market supply and market demand forces in the market.

What to Produce?

A producer will produce those goods and services in the market which are highly demanded by the consumers. Such goods and services will offer high prices and high profits to the producers. The economy will produce up to the level where the high price of the product can be ensured. The allocation of resources is determined by consumer preferences.

How to Produce?

In the capitalistic economy, the producer will use those inputs or techniques that will reduce the cost of production as much as possible so that the profits can be maximized.

For whom to produce?

The producer will produce goods for those people who can afford to pay a high price Rich section of society can afford to purchase at a high price. Poorer sections of society are often ignored. It causes the problem of inequality between a rich and poorer section of society.

Merits and Demerits of Capitalistic Economy

Merits	Demerits
Large variety of goods and services	Inequality between Rich and Poor
Improves standard of living	Common welfare is ignored
Maximum satisfaction of consumers	Money Wastage on advertisement etc.
Maximum efficiency in production	Production of non-essential goods
Benefits of Price Mechanism	Economic instability
Private ownership of Factors of Production	Employment insecurity
Growth of  business	Creation of monopolies

 

Multiple Choice Questions:

1. The items that consumer buy are called as

 a. Private property

      b. Factors of Production

      c. Producer’s goods

      d. Consumer’s goods

2. Which of the following is a defining feature of free market?

      a. The means of production are owned by government, not private individuals.

      b. The government does not interfere in any way with the economic decisions of buyers and sellers.

      c. the is a large number of buyers and sellers.

      d. None of the above

3. The following country is an example of a capitalistic economy.

       a. China

       b. USA

       c. India

       d. None of the above

4. In which economic system do the private firms own all factories and companies?

    a. Capitalism

    b. Mixed Economy

    c. Socialism

    d. All of these

5. In a capitalist economy, the question of how society chooses to employ the resources to produce goods and services is determined by:

    a. Business

    b. Government

    c. Government and Business

    d. All of the above

6. In a free market when consumers increase their purchase of a good and the level of ………. exceeds……….. then price tends to rise.

    a. Demand, Supply

    b. Supply, Demand

    c. Price, Demand

    d. Profits, Supply

7. The other name of Free Economy is a

    a. Socialistic economy

    b. Capitalistic Economy

    c. Mixed Economy

    d. None of the above

8. When referring to the free enterprise system, “Private property” means that…

    a. No one is allowed access to a market place.

    b. Equipments and buildings can be owned by individuals or business.

    c. One must ask permission before taking any decision

    d. Things and buildings can be owned by individuals and government.

9. In a free enterprise economy, private property is

    a. Encouraged 

    b. Discouraged

    c. Limited

    d. Non-existent

10. Who makes the decision in a free economy?

    a. The consumer and business

    b. The government

    c. Foreign nationals

    d. Voters

    c. Limited

    d. Non-existent

10. The basic ideas that make a free enterprise system work are.

    a. Competition, profit and private property

    b. Freedom, efficient use of resources and profit

    c. Profit, efficient use of resources and risk

    d. Natural resources, profit, and private property

Answers:

 

1.      d	2. b	3. b	4. a
5. a	6. a	7. b	8. b
9. a	10. a	11. a