CHAPTER-2 ECONOMIC SYSTEM

Prof. Lucks says, "An economic system consists of those institutions which a given people or nation or group of nations has chosen or accepted as the means through which their resources are utilized for the satisfaction of human wants."

Definition of an Economic System

An economic system is the type of rules and schemes used by a group of people to exchange valued goods and services between different parties. Having a system that this group agrees upon is necessary for the relative success of trade. Different types of systems exist around the world and are usually heavily linked to the actions of a government. A capitalist economy is an economic system in which the production and distribution of commodities take place through the mechanism of free markets. Hence it is also called as market economy or free trade economy. Each individual be it a producer, consumer or resource owner has considerable economic freedom. An individual has the freedom to buy and sell any number of goods and services and to choose any occupation. Thus a market economy has no central coordinator guiding its operation. But self-organization emerges amidst the functioning of market forces namely supply, demand and price. The salient features of capitalism are An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.

Right to Private Property: Individuals have the right to buy and own property. There is no limit and they can own any amount of property. They also have legal rights to use their property in any way they like. Profit-Motive: Profit is the only motive for the functioning of capitalism. Production decisions involving high risks are taken by individual only to earn large profits. Hence, profit-motive is the basic force that drives the capitalist economy. Freedom of Choice: The question what to produce? will be determined by the producers. They have the freedom to decide. The factors of production can also be employed anywhere freely to get due prices for their services. Similarly consumers have the freedom to buy anything they want.