What is an economic system?

An economic system is a set of economic institutions that dominates a given economy. In turn, economic institutions are those social organizations, relationships and arrangements which determine in a given society the manner in which scarce resources are utilized to satisfy human wants. 

Economic institutions stand side by side with other social institutions which deal with political, religious and educational affairs. Examples of economic institutions are those institutions dealing with production, marketing and distribution, financing, consumption and business in general. An economic system determines the answer to the fundamental economic questions; such is it principal objective.

While the major economic decisions of “what to produce,” “how to produce,” and for “whom to produce” are the concerns of all societies, the means by which these decisions are carried out does differ markedly between the type of economic system. Every economic system attempts to achieve in one way or another, a viable economy where society as a whole can be able to maximize the general welfare of the citizenry focusing towards a common goal: high standards f living for all their citizens.

Regardless of what economic system a country adopts, salient functions should characterize any economic system, namely:

1. To produce the goods for consumption of the population

2. To utilize the resources in efficient method of production

3. To employ the labor force in occupations where productivity is at optimum

4. To apportion the wealth and income available to everyone in an equitable manner

5. To encourage innovation and technology in order to maximize efficiency, optimize satisfaction and minimize waste