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The framework of a market or capitalist system contains six essential features: private property, freedom of choice and enterprise, self-interest, competition, the price system, the role for government.
Private property.
The institution of private property is a major feature of capitalism. It means that individuals have the right to own, control and dispose of land, buildings, machinery, and other natural and man-made resources.
Freedom of choice and enterprise.
Freedom of enterprise means that individuals are free to buy and hire economic resources, to organize these resources for production, and to sell their products in the markets of their own choice. Freedom of choice means that owners of land and capital may use these resources as they see fit. It also means that workers are free to enter (and leave) any occupations for which they are qualified. Finally it means that consumers are free to spend their incomes in any way they wish.
Self-interest.
Each unit in the economy attempts to do what is best for itself. Firms will act in ways which, they believe, will lead to maximum profits (or minimum losses). Owners of land and capital will employ these assets so as to obtain the highest possible rewards. Workers will tend to move to those occupations and locations which offer the highest wages. Consumers will spend their incomes on those things which yield the maximum satisfaction.
Competition.
In theory competition is the regulatory mechanism of capitalism. On the one hand, it protects the customers – they have the right of choice and they benefit from the fact that competition keeps prices close to costs; on the other hand, it makes producers and suppliers of scarce resources utilize them economically, using most sophisticated technologies.
Markets and Prices.
The price system is an elaborate system of communications in which innumerable free choices are aggregated and balanced against each other. The decisions of producers determine the supply of a commodity; the decisions of buyers determine the price. Changes in demand and supply cause changes in market prices and it is these movements in market prices, which bring about the changes in the ways in which society uses its economic resources.
The role for government.
Freedom of enterprise is not total in the market economy. Businesses are subject to laws and government regulations.
Economic environment is determined by the economic policies of the government, fiscal and monetary policies being the major f
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