Capitalism is a system of economic organization. In this system, private ownership of property, free enterprise, and competition prevail. Goods and services are distributed among the buyers based on their ability to pay. When the demand is high, prices would increase for more profit. New firms also enter into the industry upon sensing the existing opportunities.
When demand is falling, prices generally fall as well. Firms in the industry will decrease their production. They’ll also try to put their time and resources in other industries where there’s a higher demand. In a capitalist economy, firms are buyers and sellers. They purchase supplies and materials from other firms. In doing so, their behavior is similar to individuals who decide what to buy and how much.
If a new machine has the potential to reduce production costs, the firm will have it installed. This is done so that it can compete with other firms. Similarly, if a material used as a substitute for another can save costs, the firm will use it. Some of the prominent features of capitalism are:
1. Owning private property
This is one of the most important features of capitalism. There’s an existence of private property and inheritance. Everyone can acquire private property and retain ownership. After his or her death, the property passes on to the heirs.
2. Price mechanism
In capitalism, there’s a free working price mechanism that guides consumers. Price mechanism refers to the free working of the forces of demand and supply. There’s no intervention in this regard. Producers can decide what, when, where, and how much to produce. This mechanism results in an adjustment of supply to demand. In the words of Adam Smith, the price mechanism is an invisible hand that operates the capitalist.
3. Co-existence of competition and co-operation
A capitalist economy is run by free competition as entrepreneurs compete to get the highest profit. The buyers compete for buying goods and services. Workers also compete with the machines as well as among themselves for a particular work. Machines are made to ensure that the line of production runs according to the schedule. In this manner, competition and co-operation co-exist with each other.
4. Profit motive
In capitalism, enterprises exist with the sole purpose of earning profit. This is also the primary motive behind any economic activity. The entrepreneurs come up with industries or occupations that would earn a maximum profit for them. Industries that are expected to incur losses are abandoned. An entrepreneur undertakes a high risk for earning the highest amount of profit.
5. More power to the consumer
Under capitalism, the consumer is the king. The entire framework of production is designed to fulfil the needs of consumers. As entrepreneurs need consumers to sell their products or services, their tastes govern the entire production line. If the end product is liked by consumers, the producer earns high profits.
6. Freedom of entrepreneurship, occupation, and control
n a capitalist economy, any individual is free to start an enterprise of his or her choice. People have the freedom to pursue occupations that are in accordance with their abilities and taste. There’s more freedom of entering into a contract. A firm can enter into a contract with another firm. A supplier can contract with a firm and an employer can enter into a contract with trade unions.