Capitalist economy is an economic system which allows private property and in which financial decisions are taken privately. 

Characteristics of capitalist economy :

• Right to private property : In a capitalist system, every individual has the absolute right to own private property and to use it according to his wish. Private property can be also bequathed to his heirs after his death. 
• Economic freedom : In capitalism, a person has the freedom to use his property in any manner he wants, and also to select his enterprise. 
• Consumers’ sovereignty : In this economy, the sovereignty of the consumer is of special importance. The consumer is free to consume according to his interest and priority, and capability. 
• Objective of earning personal profit : In a capitalist economy, earning personal profit is the chief objective. No economic activity is done without motivation of personal profit. 
• Competition : In capitalism, competition is seen among buyers and sellers in commodity markets and resource markets. 
• Pricing structure/mechanism : In a capitalist economy the conduct, coordination and control of all economic activities is done by price mechanism, and not by any central authority.

Following are the merits of capitalist economy :

• Efficient production : Due to the motive of earning maximum profits and existence of absolute competition in the market, every entrepreneur tries to produce a better and more durable item as compared to another entrepreneur and uses ever-new techniques for this purpose. He also tries to minimise the cost of production thus, to maximise the profit. 
• Flexibility : Flexibility is an important characteristic of this type of economy. It has the capability of moulding itself in any way according to the need of time. 
• Development of the individual : Every individual makes efforts to increase his qualification and abilities in this competitive market because success is attained by the best person in trade. 
• Increase in standard of living : In capitalist economy, due to variation in products and items, the producer starts doing production on a large scale, due to which his cost of production starts to decrease and he sells the products at a lower price in the market. Due to this the standard of living of poor people increases. 
• Optimum use of resources : In a capitalist economy, the ultimate objective of the producer is increase in profits, therefore all the sources which are available in the economy are used in an optimum way and there is no misuse or wastage of resources.
• Automated : Price mechanism plays an important role in working of this economy. There is no type of external interference in this economy.  Technical advancement : Mutual competition exists between producers in a capitalist economy. Every producer wishes to produce maximum products at minimum cost, and for this, he uses the latest techniques of production. Capital formation is encouraged due to this.

Disadvantages of capitalist economy : 

Its major defects are the following:

• Unequal distribution of income and wealth : Inequality is seen in the distribution of income and wealth in this economy. This inequality arises due to private property, free competition, desire to earn maximum profit, etc. The rich become richer, and the poor become poorer. 
• Class struggle : Due to inequality in income and wealth, the society is divided into two classesone, the wealthy class and two, the poor class. The rich class lives a luxurious life, while the poor class finds it difficult to earn two square meals. This situation later on gives rise to class conflict. 
• Business cycle and economic instability : Because of being automated, the economy witnesses continuous ups and downs. Sometimes business becomes bullish while at other times, deperssion sets in. This results in great fluctuations in production and prices. 
• Unemployment and social insecurity : Due to existence of business cycles in a capitalist economy, the state of unemployment is created. Labourers/workers have no jobs and they become dependent on the wealthy class. Due to unequal distribution of wealth, their level of income drops and insecurity always remains in their life. 
• Exploitation : The exploitation of workers happens the most in a capitalist economy. Because of their marginal productivity, they do not receive fair wages in this system. They only get subsistence wages.