What is an Economic System?
It is the method by which a nation's or society's limited resources are produced, arranged, and distributed. Different economic systems' primary goal is to control production inputs including land, labor, capital, and businesses.
Economic systems can be categorized into four main types based on how they solve basic economic problems such as what to produce, how to produce, and whom to produce.
Types of Economic Systems
- Traditional economic system
- Command economic system
- Mixed economic system
- Market economic system
Traditional Economic System
It is based on the production, consumption, and distribution of goods and services by specific groups of people. It's the old way of running a system without the complexity of what, how, and for whom to produce. Their needs are not so great and can be solved with a small division of labor. This does not require specialized knowledge, as economic activity is mainly based on farming, hunting, fishing, and collecting resources. There is a simple solution to a basic question.
What should be created?
Ans: Whatever the community wants
Production method?
Labor intensive and somewhat divided according to the specialties of the people living in that community.
Whom to produce?
Specific communities(people of specific cultures)
Command Economic System
In this system, the government controls all economic activities such as resource allocation, production decisions, and centralized resource management. But people regulate less important industries like agriculture. They are slow to respond to individuals but quick to respond during economic crises and emergencies. In this economic system, almost all industries are under state control. The best example of a command economy is North Korea.
Market economic system
There are three basic economic questions in this: what is produced, how is it produced, and for whom is it produced?
An economic system that solves these economic problems through market mechanisms is called a market economy. The allocation of economic resources by market mechanisms involves the interaction of two opposing forces, supply, and demand. A market economy often called a capitalist or free enterprise economy is an economic system in which the private sector conducts all economic activities related to consumption, production, and distribution. Each person is driven by his own interests.
The best example of a market economic system is the USA.
They are based on a free market or perfectly competitive market system. There is no governmental interference in basic economic activity such as production, consumption, and distribution.
The entire economic system is regulated by supply and demand.
The government has little control over resources. This system is fictitious and does not exist in reality. Public (street lighting) production is problematic because producers are profit-oriented in a market economy. They meet the demand for consumer goods not for public goods.
Mixed economic system
It is a dual economic system that incorporates elements of state and market economic systems. The majority of nations around the world embrace mixed systems, in which the government controls the market as well as customer demand and supply. We can see that both public and private businesses are in a balanced state.
Conclusion
Finally, the traditional system focuses on basic goods and services influenced by tradition and belief. The command economic system is under government control. The mixed economy is under the control of the government and the power of supply and demand in the market system. Whatever the system, the ultimate goal of the economic system is to manage the scarce resource without any discrimination and to better serve the three economic actors that are the producer-consumer and the State.