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Economic System

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An economic system is the set of property rights, resources allocation arrangements, and incentives that a society uses to solve the economic problems. Since the human wants are unlimited and productive resources such as land and other natural resources, raw materials, capital requirements are scarce, there arises the problem of how to use scarce resources to achieve maximum satisfaction. This kind of problem is called economic problems. Such a problem is not only felt by individuals but also by the society as a whole. Each society uses an economic system to solve the economic problem.

There are two main types of economic systems are Capitalism and Socialism.  


Capitalism is an economic system characterized by private ownership of the factors of production, market allocation of resources and the use of economic incentives. No real world economy can be regarded as a pure capitalist, but the economies like USA, UK, and Germany, the major traits of capitalism dominates. The main features of capitalist economy are:

  • Right of private property: It means that productive factors such as land, factories, machineries etc. are owned by private individuals. The owners of these factors inputs have the freedom to use them in the way they like. It means that by using the factor inputs they will produce only those goods and services that people want and will offer them at prices higher than the cost of production.
  • Market allocation of resources: It is the use of relative prices to determine what, how and for whom to produce. Since capitalism permits right if private property, an owner of private property has the right to use the property to his best advantage and sell to goods and services at the best price possible.
  • Freedom of choice by consumers: In capitalist economy all consumers enjoy the freedom to choose the commodities and services they want to consume. The question regarding what to produce is ultimately decided by consumers and producers produce only those goods that are demanded by consumers. This is known as consumer sovereignty.
  • Competition: Since everybody is free to wake up any occupation or start any business he likes, competition prevails among sellers in selling as much as commodities as possible through advertisements and other promotional activities.
  • Importance of price system: Price in a capitalist economy is determined by the market forces of demand and supply. It is the price which equates the demand and supply.


Socialism is an economic system characterised by state ownership of the factors of production, the use of moral as well as economic incentives, resources allocation by economic plan and centralised decision making. The main features are:

  • Planned allocation of resources: In case of socialist economy the decision regarding what, how and for whom to produce are made by the government. A central authority determines output targets and makes the basic investment decisions.
  • Economic equality: A socialist system reduces economic inequalities of income and wealth, although perfect equality is not guaranteed. Since industrial and business enterprises belong to the state, the gap between the rich and the poor is narrowed down.
  • Collective ownership of means of production: In a socialist economy means of productions are owned by the whole community represented by the state and the state has the right to use and exchange property. Individual ownership of property has been limited to small farms, workshops, trading firms, private home, and so on.
  • Emphasis on social welfare: The real aim behind an economic activity in a socialist society is social welfare and not private profit. Since industrial and business establishments belong to the state, goods and services which are essential for promoting social welfare are produced in adequate quantities.

Mixed Economy

Now most of the economies are mixed economies. It is neither pure socialism nor capitalism. The influence of both systems are reflected in mixed economy. A mixed economy is operated both by public and private enterprises. At the same time it recognises the importance of public sector to promote the interests of the society as a whole. It is a planned economy and exists dual pricing system.

  Difference Between Capitalist Socialist and Mixed Economy Comparison Summary  


Prepared by

Veena Vinod


Kairos Institute, Thodupuzha

   2022-02-15 14:04:39
   Kairos Institute

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