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Economic Systems

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Economic Systems

Have you ever thought about how our society functions? How do certain decisions get made and who gets to make them? To be able to answer those questions, you have to know about economic systems. They are the foundation for sorting out how to handle resources and production. To learn about economic systems, their functions, types, and more, read on!

Economic Systems Definition

An economic system is a way for communities or governments to manage and efficiently disperse resources, services, and products. It governs elements such as land, currency and labor. It also consists of multiple organizations, institutions, decision-making procedures, and consumer habits that make up the framework of a specific society.

An economic system is a way for communities or governments to manage and efficiently disperse resources, services, and products.

Economic Systems Overview

Nations all around the world use economic systems to allocate resources and exchange products and services. The purpose of them is to manage the four production components, which are labor, capital, entrepreneurs, and material assets. Simply put, these production factors include a company's personnel and finances, along with connections to entrepreneurs. Resources required to operate a firm, as well as the data and information used by businesses to succeed, are all necessary components. The way the resources will be handled and which production components that will be used all depend on the type of economic system a society has.

There are four main types of economic systems:

  • Command
  • Market
  • Mixed
  • Traditional

Entrepreneurs are people who wish to manage enterprises or establish their own businesses.

Functions of an Economic System

There are four main functions of an economic system, and the answers will determine what type of system the society has:

  • What to produce?
  • How much to produce?
  • How to produce?
  • Who gets what?

What to produce?

The most essential job of an economy is to determine what commodities and services will be produced. And while demands are limitless, resources are not. As a result, society is confronted with the challenge of selection.

One of the first things that society then has to figure out is what to produce. The provided resources are used to produce various items and services in order to satisfy the greatest number of consumer desires. Therefore, the community must choose between consumer and capital products.

Things become a bit more complicated when talking about consumer goods since a choice must be made between products for general consumption and those for luxury.

How much to produce?

Should production be at maximum potential or should there be some jobless people and wasted resources? How much to manufacture is governed by customer demand; unless someone purchases a particular item, manufacturing of that item would stop and a surplus would accumulate.

How to produce?

The next main issue to tackle is the issue of how to produce. In order to help figure out the answer, there are a few things that are taken into account before making a decision:

  • Which commodities will be manufactured in the public vs private sector?

  • Which companies will be hired on to produce the commodities, and how many resources will be given to them to use for production?

  • Which manufacturing methodologies will be adopted to ensure maximum output?

The community should adopt a style of production organization that can adequately meet the greatest number of people's desires.

Who gets what?

The allocation of output in society is another critical role of an economic system. The following criteria must be examined in order to ensure an equitable and efficient allocation of production.

  • How output is allocated between households and the government.

  • The ideals of fairness and efficiency

In a capitalist system, for example, allocation is done via the pricing mechanism, which produces disparities. Because of this, income plays a large role in who gets what.

Capitalism is an economic system wherein individuals own and manage property in accordance with their desires, and free market forces establish prices in a way that fits society's best interests.

The pricing mechanism is the method through which the market forces of supply and demand determine commodity prices.

Types of Economic Systems

Economic systems are classified into four kinds. Each method has advantages and disadvantages.

Command Economic System

The essential economic choices in command economies are made by the governments. The government decides which commodities will be produced, as well as the pricing and pay rate. Farms and companies are owned by the government instead of the people. Laborers are instructed on what and how much to create. They are assigned a production goal to accomplish and are expected to accomplish it. The decision of what has to be manufactured is a challenge in a command economy.

Command economy is an economy where the government controls what commodities are produced, the pricing of items, what services will be available, and the incomes of laborers. This type of economy is usually seen in communist regimes.

One advantage is that costs are fixed and consumers know how much everything will cost. However, it doesn't create the perfect society for a few reasons. For example, the production of commodities isn't always in sync with demand, and substandard management of the commodities frequently results in rationing. Also, professionals are valued for obeying orders instead of taking chances, which discourages innovation.

An example of a command economy today would be North Korea.

Check out our explanation of Command Economy to learn more!

Market Economic System

Decision-making in a market economy is dictated by price fluctuations that happen between producers and consumers. Individuals and companies own companies and farms. Each company or farm determines what they wish to create.

Also referred to as capitalism or laissez-faire economies, market economies are economic systems wherein market decisions are governed by price fluctuations that occur when sellers and consumers interact to set the sale of products.

The amount individuals pay for items is determined by supply and demand. The amount of commodities available is known as supply, while the number of people that desire the items is known as demand. One advantage to this type of economy is that buyers are able to locate what they want and purchase as many of the items as they want and can finance. An issue is that there is no pricing stability, and enterprises that are mishandled can fail. Workers could lose their employment and salaries if this occurs.

Singapore is a good example of a market economy.

Supply is the amount of commodities available

Demand is the number of people that desire the commodities

We also have an explanation of Market Economy. Cool, huh?

Mixed Economic System

A mixed economy combines elements of command and market economies. All of the societies present-day have features of both systems and are frequently called mixed economies, despite the fact that almost all societies tend to learn toward one form of economy than the other.

A mixed economy is an economy that combines parts of command and market economies

It also reduces the drawbacks of market economies. A market economy may overlook industries such as military and tech. A greater government involvement enables a faster response speed to these key sectors.

The increasing government involvement also ensures that less competitive individuals are looked after. This eliminates one of the drawbacks of a market economy, which favors only the most successful or inventive. However, in a mixed economy, the individuals who are unable to compete at all are still left out.

A country that has a mixed economy would be the United States.

We are three for three! Explanation of Mixed Economy here!

Traditional Economic System

With traditional economies, historical norms and habits govern what and how things are created, distributed, and spent. Every individual within this society understands their place in the greater group. Because occupations are handed down through generations, there is minimal change in professions over time. People are counted on to do their work and the entire society can collapse if people neglect to do their share. This type of economy includes hunting, farming, etc. Furthermore, in traditional economies, bartering is utilized for business.

The country of Bhutan is a prime example of a traditional economy.

A traditional economy is an economy where historical norms and habits govern what and how things are created, distributed, and spent

Bartering is trade without the use of actual money

Forms of Bartering

As far as bartering is concerned, many people think it to be something medieval and old-school. But bartering happens all over the world still today! Temporary home swaps, social media influencers getting free products from a company to review the products and advertise them, and even in some cases marriage are examples of bartering!

economic systems marriage bartering studysmarterMarriage and Bartering. Source: WikiMediaCommons

But how, you might ask, is marriage a type of bartering? If you want to think more of a "traditional" marriage that was prevalent many decades ago like in the figure above, a marriage was an exchange between a man and a woman where the woman would get someone to see to her safety (both physical and financial), and perhaps a title or even just the privilege of marrying into a well-connected family. The man, on the other hand, would receive children from the woman in exchange so he can carry on the family line.

Economic Systems Example

To give an example of an economic system in action, you don't need to look further than the United States.

The United States has a mixed economy, which includes components of the command and market economies. Regarding consumer products and corporate services, the U.S. economy works as a free market. But in terms of military, it resembles a command economy. The government supervises these activities and defends the nation's diversified economic structure. Work and natural resources are examples of supply, whereas demand is exemplified by human consumption.


Economic Systems - Key takeaways

  • An economic system is a way for communities or governments to manage and efficiently disperse resources, services, and products.
  • Nations all around the world use economic systems to allocate resources and exchange products and services.
  • There are four kinds of economic systems: command, market, mixed, and traditional.
  • Bartering is trade without the use of actual money.
  • The most essential job of an economy is to determine what commodities and services will be produced.

Frequently Asked Questions about Economic Systems

An economic system is a way for communities or governments to manage and efficiently disperse resources, services, and products.

An example of an economic system would be the mixed economy that the USA has.

There are four kinds of economic systems: Command, market, mixed, and traditional.

These are the limits placed on the firm's activity by the government.

The purpose of them is to manage the four production components, which are labor, capital, entrepreneurs, and material assets

Final Economic Systems Quiz

Question

What's a market economy?

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Answer

A market economy is described as a system in which the production of products and services is determined by the changing demands and capacities of market participants.

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Question

The distribution of available resources for diverse purposes is referred to as ...?

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Answer

Resource allocation

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What's an economy?

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An economy is a mechanism for organizing the productive and consumptive functions of a society.

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What are 5 characteristics of a market economy?

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Private property, freedom, self-interest, competition, minimum government intervention

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Which of these is not an advantage of a market economy?

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Answer

It has the potential to cause product prices to rise.

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What's an example of a pure free market economy?

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Answer

Each country contains free-market elements, however there is no such thing as a completely pure free market economy

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A market economy is governed by the forces of ______ and ______

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Answer

supply and demand

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What's a capitalist economy?

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A capitalist economy is a system centered on the private ownership and operation of means of manufacturing for profit.

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Are market economy and capitalist economy the same thing?

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No. Although the capitalist and market economies, in a sense, are based on the law of supply and demand, they are referring to separate things. 

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What's the difference between a market economy and a capitalist economy?

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Answer

Capitalism is concerned with the generation of revenue along with the ownership of capital as well as factors of production. A market economy, on the other hand, is concerned with the exchange of money or products and services.

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Why is there praise for innovations in a market economy?

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Innovative new items will better suit the demand of consumers than existing products and services. These innovations will spread to other competitors, allowing them to become more profitable as well.

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How do market economies help decrease the number of people unemployed?

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Answer

In a market economy, a clothing industry entrepreneur, for example, will require a significant number of staff to get the firm up and running. This implies more employment and fewer people out of work.

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Why are the disadvantaged left out of the competition in a market economy?

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Answer

Competition is the primary driver of a market economy. Consequently, there is no structure in place to provide for individuals who are already at a competitive disadvantage.

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Why would prices rise in a market economy?

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Because businessmen have the authority to dictate the market and product pricing. They can dominate the distribution of commodities and set the prices at which these things are sold.

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What type of economy is the US?

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Answer

The US is frequently seen as a market economy or a good example of an economy that reflects the principles of a market economy. Yet, economic analysts frequently do not believe it to be completely pure due to minimum wage laws and antitrust laws, business taxes, and import as well as export taxes. 

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Question

What's a command economy?

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Answer

A command economy is a type of political economy in which a centralized governing body determines the allowable levels of output and the amounts that may be demanded for products and services.

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What's a market economy?

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Answer

A market economy is a type of economic system in which two forces, supply and demand, govern the creation of products and services.

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Question

What are the characteristics of a command economy?

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Answer

  • Major industries are owned by the public
  • Inventory levels and distribution mandates are under government control.
  • Prices, as well as wages, are under government control. 
  • Strong control over speech/social media is used and propaganda is commonly utilized to advertise the country's success.

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_______ are abundant in command economies.

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Answer

Monopolies 

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What's a monopoly?

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A monopoly is when there is a single seller that dominates the market.

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Define communism

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Answer

Communism is an economic system in which individuals do not own land, industries, or machinery. These items are instead owned by the government or the entire community and everyone is expected to share the riches they generate.

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Question

A command economy is an ________ term for any controlled economic system.

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Answer

umbrella

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What are the advantages of a command economy?

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Answer

  • It prohibits monopolization
  • There's an increase in industrial power
  • It modifies manufacturing rates and the availability of finished items
  • It enables greater resource mobilization 
  • It places a high value on social welfare

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Why is it said that command economies limit freedom?

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A command economy takes away people's liberty and places complete authority in the government's hands alone.

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There ___ competition in a command economy.

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Answer

isn't

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What's a mixed economy?

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A mixed economy is a system that allows private property and provides for some economic freedom concerning the use of capital, but on the other hand it also permits governments to intervene in economic activity to achieve social goals.

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The command economy is an essential component of every ________  _______.

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Answer

communist society

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What happens to the quantity of goods within a command economy?

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Answer

The quantity becomes unbalanced

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Due to government limitations, some products and services are not available in command economies. Where do people go to get these things then?

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The black market

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Why don't monopolies exist in command economies?

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Because the government regulates all market forces, it's simply not possible for a monopoly to reign in a command economy. Apart from the government, no supplier will be granted the authority to set the market.

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What's a mixed economy?

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A mixed economy is an economic system wherein free markets and government involvement are able to coexist when it comes to resource distribution, commerce, and trade.

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What's resource allocation?

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Resource allocation is the allocation of existing resources to different uses.

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Most countries throughout the world use some type of a ______ economic system. 

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Mixed

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Name at least 3 characteristics of a mixed economy

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Answer

  • It safeguards private property. 

  • It permits prices to be determined by the free market and the principles of supply and demand. 

  • It is motivated by the self-interest of people.

  • It enables the government to protect both the people and the market. 

  • The government plays a significant part in the military, foreign trade, and domestic transportation.

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What are the advantages of a mixed economic system?

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  • It gets products and services wherever they're needed the most
  • It gives the largest profit to the best producers
  • It promotes innovation in order to address client requirements
  • It provides cash automatically to the most inventive and efficient producers

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What's capitalism?

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Answer

An economic system centered on the personal ownership and management of means of production for profit

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What's communism?


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Communism is an economic system that aims to establish a fair society in which the principal means of manufacturing, like factories and mines, are owned and managed by the general public.

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What are factors of production?

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Factors of production in economics are things that are utilized in the production process to create output

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Define socialism

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Socialism is an economic system which believes that shared resource ownership and central planning result in a more equitable distribution of products and services as well as a more equal society.

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What are the disadvantages of a mixed economy?

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  • Excessive taxation
  • Government monopolies
  • Ineffective regulation

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Mixed economies put ___ over all else.


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Profit

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Mixed economies recognize the dangers of uncontrolled ______.

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capitalism

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In mixed economies, the increasing government involvement ensures that less _______ members are cared for.

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Answer

competitive 

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The working class is in danger of being exploited within mixed economies.

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Answer

True

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Question

The economic system used by society, like a command economy, market economy, or mixed economy, has a considerable effect on ________ __________.

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Answer

resource allocation

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What's an economic system?

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Answer

An economic system is a way for communities or governments to manage and efficiently disperse resources, services, and products.

Show question

Question

Nations all around the world use economic systems to allocate ______ and exchange products and services.

Show answer

Answer

resources

Show question

Question

Define entrepreneur

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Answer

Entrepreneurs are people who wish to manage enterprises or establish their own businesses.

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Question

What are the four types of economic systems?

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Answer

Command, Market, Mixed, Traditional

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What are the functions of an economic system?

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Answer

To figure out what to produce, how to produce, how much to produce, and who gets what

Show question

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