4 Types of economic systems

Economic systems are classified as follows:

1. Traditional economy (agriculture, barter and exchange)
2. Market economy (capitalism)
3. Command economy (communism)
4. Mixed economy (characteristics of both capitalism and communism)
 

Traditional economy

Traditional economy is an economy where production methods, exchange and distribution of income are made according to costumes and traditions. The problem of production in traditional economy is met by using tradition as the mechanism in identifying which goods to produce, in assigning the task in the production process, and in deciding the type of production technology to be used.

Basically a subsistence economy production (self-sufficient) is shared within the community with members taking only what they need. This type of economy is a very backward one since it does not provide new avenues for changes to respond to the needs of the time.

Market economy

Market economy is an economy characterized by the private ownership of resources and the use of a system of markets and prices to coordinate and direct economic activity. It has been know by similar terms like Capitalism, Free-enterprise economy, or laissez-faire (means “let alone” or “let it be”) economy. The term laissez-faire means keep government from interfering with the economy, because such interference will disturb the efficient working of the market system.

The role of the government is limited to the protection of private property and the establishment of an appropriate legal framework for free markets. The decisions on what goods and services are produced, how they are produced and how they are distributed are determined by competition and consumer demand. The production activities are intended for commercial purposes and not just for subsistence.

Profit becomes a motivating factor for producers. The system puts emphasis on the optimization of consumption and production. Moreover, it places a high value on individual freedom and allows self-interest to be the motivating force.

Command economy

Command economy is an economy characterized by public ownership of virtually all property resources and the rendering of economic decisions through central economic planning. Here, the government and not private business, directly conducts all of production activity.

Further, it determines the aims of the economy, directs production and regulates (or controls) distribution and consumption of output. Economic freedom, which the people enjoy under a Market economy such as profit motive, individual initiative and private ownership of property are forfeited from them.

Mixed economy

Mixed economy is a blend of market system and some form of government regulation and control. Private ownership of resources exists side by side with substantial public ownership of resources and government participation in economic activities. While most buyers and sellers are influenced by the price system, the government still plays a significant role in decision making with regards to production, business and industry.

The existence of price control, strict government regulations, government support and subsidy programs undertaken by the government would show the importance of its participation in decision making. In most cases, the degree of government intervention is determined by the economic and social priorities of that particular nation.