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Economic Theory

2. Traditional Economy
In traditional economy, the basic problems are solved by traditions
and custom rules every aspect of behavior. It produces exactly to its
consumption requirements. It is a subsistence economy. There is not much

of sales as there is only small scale production. The same product will be
produced by every generation. The production techniques are traditional.

3. Capitalist Economy
A capitalist economy is an economic system in which the production

and distribution of commodities take place through the mechanism of free
markets. Hence it is also called as market economy or free trade economy.
Each individual be it a producer, consumer or resource owner has

considerable economic freedom. An individual has the freedom to buy and
sell any number of goods and services and to choose any occupation. Thus
a market economy has no central coordinator guiding its operation. But
self-organization emerges amidst the functioning of market forces namely

supply, demand and price.
The salient features of capitalism are:
1) right to private property: individuals have the right to buy and own

property. There is no limit and they can own any amount of property. They
also have legal rights to use their property in any way they like;
2) profit-motive: profit is the only motive for the functioning of
capitalism. Production decisions involving high risks are taken by

individual only to earn large profits. Hence, profit-motive is the basic force
that drives the capitalist economy;

3) freedom of choice: the question ‘what to produce?’ will be
determined by the producers. They have the freedom to decide. The factors
of production can also be employed anywhere freely to get due prices for
their services. Similarly consumers have the freedom to buy anything they

want;
4) market forces: market forces like demand, supply and price are the
signals to direct the system. Most of the economic activities are centered

on price mechanism. Production, consumption and distribution questions
are expected to be solved by market forces;
5) minimal role of Government: As most of the basic economic
problems are expected to be solved by market forces, the government has

minimal role in the economy. Their role will be limited to some important

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