(a) What is an economic system? (b) Outline any four features of a capitalist economy.

Answer Details

(a) Economic system. An economic system is the organised way in which a society allocates its scarce resources to answer the three basic economic questions: what to produce, how to produce, and for whom to produce. It defines who owns the means of production and how decisions on production, distribution and consumption are made. The main types are capitalism, socialism and the mixed economy.

(b) Four features of a capitalist economy.

1. Private ownership of the means of production. Land, capital and firms are owned and controlled by private individuals, not the state.
2. Freedom of enterprise and choice. Producers are free to produce and sell what they wish, and consumers are free to buy what they can afford.
3. The profit motive. Production is undertaken mainly to earn private profit, which guides what is produced and how.
4. The price mechanism (market forces). The forces of demand and supply, working through prices, allocate resources with little or no government direction; this is the invisible hand.

Other valid features include competition among producers and consumer sovereignty.

Examination reminder: tie each feature to the idea of private decision-making guided by prices, which is the essence of capitalism.