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An Economy or Economic system is a system or mechanism of production, distribution, and consumption. An Economic system deals with the production, distribution, and consumption of goods and services in a particular society. The Economic system is composed of people, institution, and their relationships. An Economy basically deals with the resource allocation problem of Economics.

In these notes, you will learn about three different types of Economy viz.



capitalist economic system

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  • In this economy, resources are managed by and owned by private persons.
  • It is a free economy and there are no government interventions.


  1. Right to private property: Factors of productions are under private ownership and they are free to use in like manner.
  2. Freedom of enterprises: Producers are free to produce what they want.
  3. Freedom of choice to consumers(Consumer sovereignty): Consumers are free to choose that good which they want to buy.
  4. Profit motive: Producers produce those goods which give them a higher profit. Capitalism is a system of mutual exchange where the price-profit mechanism plays a crucial rule.
  5. Competition: Due to freedom of choice of consumer there is a great competition among sellers.
  6. Uneven distribution of profit: There is an uneven distribution of income due to unequal distribution o property.
  7. Price determination: In the market economy price is determined through Price mechanism i.e. by the equilibrium of price and supply price is determined.
  8. More innovation

Merits of the Capitalist economy:

  1. Increase in production
  2. Quality products at low costs
  3. Progress and prosperity
  4. Maximum welfare
  5. Optimum use of resources
  6. Flexible system

How capitalist economy resolves their central economic problem:

  1. What to produce: That goods will be produced which are more demanded by the consumer due to increasing demand price will rise and it will give more profit to the producer.
  2. How to produce: By that technique goods will be produced due to which cost will be minimum.
  3. Technique:
    1. (A) Labour intensive  
    2. (B)Capital intensive
  4. For whom to produce: For those who have higher buying capacity.
  5. What provisions will be made: It depends on rate of return on capital


  1. Leads to monopoly
  2. Inequalities
  3. Depression and unemployment
  4. Insufficient production
  5. Class conflict

GST-Know All About It


socialist economic system

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  • It is also called Command economy or centrally planned economy.
  • There is a central authority who decides about the price of a commodity.


  1. Collective ownership: There is collective ownership which means on resources ownership is of the state.
  2. Centrally planned authority: There is a central planning authority who decides how to produce, what to produce, whom to produce and what provisions should be made.
  3. Absence of consumer choice: Here restricted goods is produced hence there is no choice to the consumer.
  4. Relatively equal income distribution: Here private capital is narrowed due to which there is equality of income.
  5. Minimum role of price mechanism: Due to presence of central planning authority
  6. Service motive: Here goods are produced with service motive to society.


  1. Greater economic efficiency
  2. Greater welfare due to less inequality of income
  3. Absence of monopolistic practices.
  4. Absence of business fluctuations.


  1. Loss of consumer’s sovereignty
  2. No freedom of occupation
  3. Misallocation of resources
  4. Bureaucratic


  • Co-existence of private and public ownership.
  • The existence of economic planning
  • It is also a planned economy government has a clear and definite role.
  • Government also creates atmosphere for private sector


  1. Best allocation of resources
  2. general balance
  3. Welfare state


  1. Non-cooperation between the two sectors.
  2. Inefficient public sector.
  3. Economic fluctuations.

Read about GST Here

Indian Economy

  • The Indian economy is a mixed economy. The public sector and private sector co-exist.
  • There is an economic planning in India. There is a planning commission at the center.
  • It formulates five years plans with the principle objective of achieving growth with social justice.
  • It lays down priorities, targets, and policies for the different sectors of the economy.


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About Shubham choudhary

Interested in mathematics , A commerce student , Always ready to learn new things

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