Government provide incentive for producers to produce more.

Government protects the right to property. However, the freedom to use property is subject to government laws and regulations. The right of private property induces the people to work hard and increase production so that they can increase their property.

Right of private property increases the rate of capital formation. 2. Price mechanism:Price mechanism means the free working of the forces of demand and supply to determine, prices in product market and factor market.

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The government does not intervene in the working of market mechanism. Price mechanism brings equilibrium between demand and supply. Price mechanism or market mechanism guides and directs the producers to decide what or how much and how to produce. The direction of all economics activities depends on the working of price mechanism. Therefore price mechanism works as the ‘invisible hand’ which controls and regulates the capitalist economy. Price system performs two important functions. It ration out produced goods and services among buyers and provide incentive for producers to produce more.

3. Profit motive:Profit is the soul of all the institutions of capitalist system. A capitalistic economy is individualistic because everyone is motivated by self-interest or private profit motive to undertake high risks.

Promotion of self-interest or desire to earn profit induces the entrepreneurs to come forward to bear risk and uncertainty of business. Each entrepreneurs uses his resources in the production of those goods and services from which they have the chances of earning more profits. Thus self-interest or private profit dynamise the capitalistic economy. 4. Vital role of entrepreneur:Entrepreneur is the soul of capitalist economy. He organizes and combines the factors of production to produce goods. It is he who bears the risk of business and no production is possible without him. 5.

Competition and combination go together:A capitalist economy is based upon free competition. There is competition among buyers, producers, sellers and workers, but they co-operate among themselves to protect their interest by forming consumer’s association, employers’ association and trade unions. 6. Freedom of enterprise:There is freedom of enterprise in a capitalist economy. It means people are free to choose their occupation, profession or business according to their will. People have freedom to contract. Freedom of enterprise is an important feature of capitalism.

This is why it is also called a free enterprise economy. 7. Consumer’s sovereignty:In a capitalist economy people have freedom of consumption. They can spend their income on consumption according to their choice. Consumers reveal their preference for goods through prices and they pay high price for the goods liked most by them. The producers produce those goods which are demanded by consumers.

It means the whole production system works according to consumers directions. Therefore, in a capitalist economy consumers are like a sovereign king. 8. Role of government:In pure capitalism government does not interfere in economic activities.

However, with passage of time government has began to play a connective role in a capitalist economy to achieve certain social objectives. In spite of government intervention, private enterprises dominate a capitalist economy. Now here in the world capitalism exists in its pure form. It is generally agreed that there are certain imperfection in a capitalist economy. Government does intervene to improve the working of free market economies.


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