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- Economic System refers to the manner in which individuals and institutions are connected together to carry out economic activities in a particular area. It is the methodology of doing economic activities to meet the needs of the society. There are three major types of economic systems.
- They are:
- Capitalistic Economy (Capitalism),
- Socialistic Economy (Socialism)
- Mixed Economy (Mixedism)
Capitalistic Economy (Capitalism)
- Adam Smith, often called the ‘Father of Capitalism,’ laid the groundwork for this economic system. Also known as a free or laissez-faire economy, capitalism minimises government intervention, allowing the market to dictate economic activities.
- Examples of capitalistic economies include the USA, Germany, Australia, and Japan. However, these countries also implement significant social welfare measures to protect vulnerable populations from market forces.
Characteristics of a Capitalistic Economy
- Private Ownership and Inheritance Rights: In capitalism, all resources like land, capital, and machinery are owned by private individuals, who have the authority to utilise, sell, or transfer these resources.
- Freedom of Choice and Enterprise: Individuals can engage in any occupation or trade and produce any commodity. Similarly, consumers have the liberty to purchase goods according to their preferences.
- Profit Motive: Profit is capitalism’s primary motivation behind economic activities. Individuals and organisations produce goods and services with the aim of maximizing profits, often utilising advanced technology, division of labour, and specialisation.
- Free Competition: Both product and factor markets operate under conditions of free competition, where firms are unrestricted in their buying and selling activities.
- Price Mechanism: The price mechanism, driven by the forces of demand and supply, plays a central role in regulating economic activities in capitalism. Prices adjust based on market dynamics to allocate resources efficiently.
- Limited Government Intervention: In a capitalistic economy, the government’s role is minimal, with economic activities primarily regulated by the price mechanism. The government typically provides essential services such as defence, law and order, justice,
