Capitalist economy can be defined as an economy in which most of the economic activities have the following characteristics: 

1. There is private ownership of means of production. 

2. Production takes place for selling the output. 

3. There is sale and purchase of labour service at a price called wage rate. 

In a capitalist country, production activities are mainly carried out by capitalist enterprises. A typical capitalist enterprise has one or several entrepreneurs. Entrepreneurs are those who exercise control over major decisions and bear a large part of the risk associated with the firm. They may themselves supply the capital needed to run the enterprise or they may borrow the capital.

To carry out the production they also need natural resources. They need the most important element of human labour to carry out production. This is called as labour. After producing output with the help of land, labour and capital, the entrepreneur sells the product in the market to earn money called revenue. Part of the revenue is paid out as rent for land, interest for capital and wage for labour and keeps the rest of the revenue as profit.

Profits are often used by the producers in the next period to buy new machinery or to build new factories, so that production can be expanded. These expenses which raise productive capacity are examples of investment expenditure.