Capitalist Economic System


Free market or Capitalist economic systems are the system in which the market forces (demand and supply) determine the resource allocation. This is also known as lassez-faire system.
Features of free market or Capitalist economic system 1) Existence of Private property:  Individuals have the right to own, control and dispose of private property.  2) Freedom of choice: The consumer is free to consume any commodity of his desire. A producer is also free to produce any commodity that would maximise his profit. 3) Self-interest: Individual behaviour is guided by self-interest. 4) Market mechanism: Demand for and supply of a commodity determines the price. This system allocates the economic resources among different productive resources. 5) Minimum government control:  Government functions are limited to such minimum as defence and Keeping law and order.
Advantages of market economic system
Market economic systems have many advantages in comparison with command economies. These include:
Consumer sovereignty: Resources are allocated towards the satisfaction of the consumer; firms can only survive if they consistently satisfy consumer demand. The more they satisfy the consumer, the greater their profits.
Choice: Firms may compete with each by offering different products, providing consumers with a wide choice.
Price and non-price competition: Competition keeps prices down and increases the quality of goods and services.
Automatic adjustment of price mechanism: The price mechanism works automatically, as prices convey information about relative scarcity without the need for a government.
Rationing indicator: Greater the scarcity, the higher the price, and the more it is conserved. So Prices act as an indicator for rationing scarce resources.
Utility and profit: The price mechanism allocates resources towards products that provide the highest utility and the greatest profit, hence benefiting consumers and producers together.
Efficiency: All participants (factors of production) have incentives (in the form of higher income) for better efficiency. The production of goods is efficient because firms need to keep costs as low as possible. Hence there will be optimum utilisation of resources.
Innovation: Firms usually need to innovate to retain consumer loyalty and win new customers from rivals.

The disadvantages of market economic systems
Market systems also have disadvantages, including:
Under-valuing non-traded services: Some goods and services cannot easily be traded in markets, such as healthcare, education, and defence. With these goods, the value attached by market forces is unlikely to be the 'real' value of the service.
Missing markets: There is the problem of missing markets, which arises when consumers have a need or a want, but markets do not exists, as in the case of public goods.
Incomplete markets: It arises when firms only supply a part of the whole market demand, such as the case of merit goods.
Externalities: Some goods and services generate costs and benefits that are not taken account by consumers and producers.
Lack of purchasing power: Some consumers have no purchasing power, such as the disabled, because they are not able to work in the labour market.  This system ignores the welfare of these groups.  Without work, they cannot derive an income, and are unable to purchase goods and services.  This will lead to inequality of income and wealth and cause economic in stability.
Wasteful competition: The domination of competition cause huge waste of human and capital resources.
Develops monopoly:  Market domination of firms leads to monopoly power.
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