Economic System is of strategic importance for an economy to decide what goods and services to be produced, how it is to be produced, and for whom it is to be produced. These questions are answered differently in different economic systems. In this article, we have discussed Capitalist Economic System.
Capitalist Economic System
In a free-market economy or a capitalist economic system, the decisions regarding what, how, and for whom to produce are governed by the market forces. In other words, demand and supply are of strategic importance in the Capitalist economic system. Only those goods and services are produced that have greater demand and that ensure greater profitability.
However, those goods that have low profitability will not be produced even if demand exists for them. For example, services such as free health will not be provided even though they are in demand as they are not profitable. This system does not acknowledge any kind of government intervention. For the production of goods and services, the choice of the factors of production is guided by the availability and the cost of factors of production. That is, those factors of production are used that are readily available and are relatively cheaper. Since the decisions regarding production are solely based on the market forces of demand and supply, economic growth is accelerated.
However, the distribution of goods and services is based on purchasing power. Only those consumers can purchase the goods and services who can afford them. As against this, those consumers who do not have the purchasing capacity will not be able to consume the goods and services. Thus, in this economic system, the welfare of the people is adversely affected.
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