What is a Capitalist Economy?

Definition: A capitalist economy is cumulative production and consumption of goods ands services when private companies own the production factors and hire workers to perform the core operations of the businesses.

What Does Capitalist Economy Mean?

What is the definition of capitalist economy? A key element of a capitalist system is the liberal economy. The driving force in a liberal economy is the free market determines the product prices by the mechanisms of demand and supply. Therefore, there is no state control or intervention in the economy, but the role of the government is to prevent monopolistic advantages with the proper regulations and maintain order with national defense and infrastructure.

Theoretically, private companies have both the incentive and the ability to run their business effectively so as to realize a profit. In larger corporations, the profits are distributed to the business owners and the shareholders in the form of a dividend payment.

Let’s look at an example.


Company X is a leading retailer. The company employs 1,200 people at all levels of the workforce and seeks to maximize its profits by catering to consumers and delivering the best product at the lowest price. Furthermore, as the competition is fierce in the industry, company X tries to keep the prices low to expand its customer base. Therefore, in a capitalist economy, like the economy of the United States, the company is driven to achieve the maximum utility at the lowest cost to realize a profit. In this case, the role of government is to protect the legal rights of companies and consumers and not to regulate the free market system.

A key component of a capitalist economy is the hypothesis that the markets are efficient, and therefore the stocks prices are determined by supply and demand, they are always fair and correct, and they help investors to make informed investment decisions. On the contrary, opponents of capitalism and the efficient market hypothesis consider that the prices are the result of mistakes and mispricing that seeks to lower the market price of stocks so that there is more room for growth.

Summary Definition

Define Capitalist Economies: Capitalist economy means private enterprise owns the factors of production in an economy.