Welcome! In our Economics lesson today, we will be looking at the topic ” Economic System “. Do have a pleasant time studying with us.

Lesson Note

Subject: Economics

Topic: Economic System

Learning Objectives: By the end of the lesson, the learners should be able to:

  1. Define the term economic system;
  2. Mention and explain the types of economic system;
  3. State the features of each type of economic system;
  4. Identify the advantages and disadvantages of each type of economic system.



An economic system may be defined as a medium or an organised way by which the means of production in a state are utilised in order to satisfy human wants. In other words, an economic system refers to the way in which the available productive resources in a state or nation are owned, managed or utilised for the satisfaction of human wants.
The type of economic system practised in any society or nation depends on the way the available productive resources are owned and the way society takes decisions on issues relating to the basic economic problems. In other words, it is the ownership of the means of production (whether private or public), how the choice is made and by whom that determines the type of economic system.

Types Of Economic System

The major types of economic systems of the world are divided into three major groups:

  • capitalism or free market economy,
  • socialism
  • and mixed economy.

Capitalism or Free Market Economy

Capitalism or free market economy may be defined as the type of economic system in which the means of production are owned and controlled by private individuals. In other words, it is the type of economic system which is characterised by private ownership of means of production. In this case, private individuals play greater role than government in taking decisions on what to produce, how to produce, for whom to produce and the distribution of what has been produced. The private individuals utilise their capital and direct its use for making of profit. Capitalism does encourage or give incentives and freedom to individuals to invest their capital and maximise their profits. Examples of countries which practise capitalism includes: the United States of America, Japan, Australia, France and Italy.

Features of Capitalism or Free Market Economy

i. Private ownership of properties: There is high degree of private ownership and control of means of production with minimal participation by the state.
ii. Existence of competition: There is also a greater existence of competition among individuals and firms as a result of effort to acquire wealth or control means of production.
iii. Maximisation of profits: Capitalism is characterised by high level of profit maximisation by private Investors.
iv. Individual satisfaction: Capitalism enables an individual to embark on actions for the least sacrifice that would give him the greatest amount of satisfaction.
v. Free market enterprise: Capitalism enables individuals the freedom to choose their occupations based on their capabilities.
vi. Production and consumption are regulated by price system: The price system determines what producers have to produce, taking into consideration the demand of the consumers and the price offered for the goods.
vii. Accumulation of wealth: As a result of individual ownership of means of production capitalism helps him to accumulate wealth.

Advantages of Capitalism

i. Free enterprise: Capitalism encourages maximum freedom of enterprise. People are not forced into a system.
ii. It encourages hard work: In capitalism, people are free to own properties and this encourages hard work.
iii. It leads to specialization: Capitalism also boosts specialization due to increase in large scale production of commodities.
iv. It encourages economic competition: As a result of individuals controlling the means of production, it generally leads to competition in the production of goods and services.
v. Provision of alternative choice: The availability of goods and services produced by private individuals enables consumers to have a wide range of choice.
vi. It ensures self-regulation and reliance: Capitalism encourages individuals to regulate their economic activities as well as helps them to be self-reliant.
vii. It promotes different forms of production: Individuals pursue different forms of production unlike when the state pursues a single form of production.

Disadvantages of Capitalism

i. It creates monopoly: As a result of the economic activities of a fee individual investor, monopoly can easily be created.
ii. It leads to economic inequality: Only few individuals have full control of the means production and this can lead to inequality in the distribution of wealth.
iii. Few individuals are enriched: In capitalism, only a few individuals are enriched while many are poor.
iv. It leads to economic exploitation: Explainantion of the majoirty by a few individuals is one of the problems of capitalism.
v. It causes economic insecurity: Job insecurity and unemployment are some of the negative characteristics of capitalism.
vi. Unhealthy rivalry: As a result of competition in a capitalist economy, it does lead to unhealthy rivalry among investors and persons.


Socialism also called centrally planned or controlled economic system is defined as the type of system in which the means of production and distribution are collectively owned and controlled by the state (the government). Companies and industries or corporations that are responsible for the production of goods and services required in the country are owned and controlled by government. The major aim of socialist economy is to produce goods and services for the general welfare of the citizen. Thus, profit maximisation is not a feature of the socialist economic system. Socialist economic system has a restricted market. It is a centrally planned economy of which there is no private ownership of means of production.
In this system also, individuals or citizens work collectively for the advancement of the country, which the government on the other hand caters for the welfare of the citizens. Goods and services produced are shared to individuals according to their needs and their contributions to the advancement of the country. But where private individuals may want to produce goods and services, they do so in trust and under very close and strict supervision by the state. Examples of countries that operated socialist system in the past included the former Soviet Union, China, Czechoslovakia, Romania, Poland, Bulgaria etc.
In Africa, they include Ethiopia, Angola, Burkina faso, Mozambique etc

Features of Socialism

i. Joint decision-making: A greater number of the citizens takes collective decision on what to produce, how to produce and for whom to produce.
ii. Non-profit motive: The motive of socialist economy system is not to make profit.
iii. Promotion of welfare: The primary aim of socialism is to provide goods and services for the welfare of the citizens.
iv. Freedom of choice: As a result of abundance of goods and services provided, the consumers have a wide range of choice.
v. Non-price competition: Prices of commodities are fairly stable unlike price competition in a capitalist economy.
vi. Equitable distribution of income: Income is equitably and evenly distributed to all citizens in the state.
vii. State ownership of means of production: All means of production and distribution are owned and controlled by the state.

Advantages of socialism

i. Absence of exploitation: There is always absence of exploitation since government provides all the goods and services required by the citizens.
ii. Centrally planned market: Government takes decisions on goods and services produced and their markets. This makes it to be centrally controlled by the government.
iii. Prevention of private monopoly: Private monopoly that exists in capitalist economy is prevented because means of production are controlled by the government.
iv. Economic security: Jobs and employment for the citizens are guaranteed and secured.
v. Absence of economic rivalry: Economic rivalries among private individuals are absent in a socialist economic system.

Disadvantages of socialism

i. Absence of alternative choice: Consumers have no alternative to choice of commodities produced. They just have to accept whatever that is produced.
ii. It reduces individual initiatives: Socialism reduces individual who in Italians as the citizen solely on government for everything.
iii. It creates room for laziness: Since government provides everything for the people, it breeds laziness among the citizens.
iv. It slows down economic development: As a result of the fact that government alone provides means of that livelihood. It tends to reduce or slow down the pace of economic development.
v. Lack of specialization: Socialism encourage division of labor and specialisation.

Mixed Economy

Mixed economy may be defined as the type of economic system in which both the private and public ownership of means of production and distribution exist together in a country. Under this economic system, resources or means of production are jointly owned and managed by both the public and private interests. The system is a mixture of elements of both capitalism and socialism. Examples of countries which operate mixed economy are Britain, Egypt, Peru, Tanzania, Nigeria, Kenya, Mexico etc.

Features of mixed economic system

i. Joint participation: In a mixed economy system, there is joint participation of both private sector and the state in the provision of goods and services.
ii. Joint decisions: Decisions on what is to be produced and the quantity are jointly taken by both the private and public sectors.
iii. Freedom of choice: Consumers in this system have freedom of choice.
iv. Checks and balances: The combination of both private and public sectors help to put a lot of checks and balances in the economy.
v. Economic freedom: There is also economic freedom in the area of production, consumption and distribution of commodities.
vi. Fair competition: Since the system accommodates the private and state ownership means of production, it results in fair competition.

Advantages of Mixed Economy

i. It encourages private initiatives: Private initiatives in this type of economic system are highly encouraged.
ii. There is freedom of choice: Consumers and even producers in this type of economic system have a wide range of choice to make.
iii. It ensures economic development: The mixed economic system promotes economic activities thereby leading to economic growth of the nation.
iv. It ensures job security: This system also promotes the security of job and employment.
v. It prevents monopoly: Monopoly is prevented because of the joint participation in economic activities by both the private and put sector.

Disadvantages of Mixed Economy System

i. Inequality of wealth: Wealth is not equitably distributed as there is a wide gap between the rich and the poor.
ii. Emphasis is on profit: There is more emphasis on profit maximisation at the expense of welfare for the citizens.
iii. Lack of efficiency: Efficiency scarcely occurs in this type of economic system because of the involvement of the state.
iv. Corruption and mismanagement: There is a high level of corruption and mismanagement of resources in mixed economy.
v. Exploitation of labour: Labour is usually exploited heavily in a mixed economic system. It should be noted that there is no country in the world which has absolute socialism or capitalism. In each country, there is some private and state ownership of means of production. It is the level of private and state ownership of means of production that determines whether such a state is a capitalist or a socialist state.

Done studying? See All Previous Lessons In Economics

Take a quick test for this lesson!

  1. Define the term economic system.
  2. Mention and explain the types of economic system.
  3. State the features of each type of economic system.
  4. Identify the advantages and disadvantages of each type of economic system.

Questions answered correctly? Kudos!

Do stay connected to itsmyschoollibrary.com for more educational contents!