Economic System and Its Main Types

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Economic system is the mechanism by which countries and governments manage wealth and exchange goods and services. The production factors, including land, capital, labor and entrepreneurship are used to regulate the systems. In other words, how the people of a nation joined together to create a complex whole and perform economic transactions between each other. Economic systems are complicated as they depend on the fact that millions of people work together in the market, driving supply and demand. For instance, it sets off a chain reaction if millions of people rush to the Apple store for the latest iPhone. There are more batteries, glass, electronic chips, and other components that Apple needs to order. In turn, in those industries, that sets off demand. In order to meet the needs of its people, every society must answer three basic economic questions:

  1. What should we produce?
  2. How should we produce it?
  3. For whom should we produce it?

A nation may decide to manufacture candy or vehicles and computers for instance. The products could be manufactured in privately owned factories by unskilled workers or by technical experts in government-funded laboratories. Once they are made, the items could be given out to the poor for free or sold at high rates that can only be afforded by the wealthy. So, the opportunities are endless. While each society answers the three fundamental economic questions differently, each encounters the same fundamental problems in doing so: allocation of resources and scarcity.

There are mainly four types of economic systems in the world: traditional economic system, market economic system, command economic system, and mixed economic system. Such economic structures are unique and have a complicated background associated with them. Such economic systems rely on a variety of structures and contexts and have their own strengths and weaknesses.

Traditional Economic System

A traditional economic system is the oldest and most conventional type economic system in the world. This economy focusses to manufacture products and services that are a direct result of its customs, beliefs, tradition, and culture. The parts of the world which follow traditional economy are mostly rural, second or third world and are very close to the land due to various farming, fishing, and cattle herding etc., where they can still be found in the agricultural areas of developing countries in Asia, Africa, and South America. This economy is based on a barter system and has no concept of money or currency. The people that fall under this type of economic system are placed around their tribes and families. This economy's primary purpose is to produce goods to meet its community's needs. There is no definition of trading, because in this kind of economic structure, people never worry of market surpluses. One most important advantage of the traditional economic system is that it preserves the tradition and custom of the area which is not possible in other economies. Each member of this economy has a particular and distinct function that makes individuals socially happy with this economy. The disadvantage of the traditional economic system is that the items widely available in other economies, such as medicines, technologies, and centralized services, are not experienced.

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Market Economic System

A market economy is completely the opposite of a command economy and is similar to a capitalist system. The main segment of the economy, like vital resources and valuable goods and services, is not regulated by the government. Industries and households act in self-interest in the market economy and dictate how resources will be allocated, what sort of products will be generated or purchased. There is completely no government involvement or influence or other controlling power, which ensures that buyers or sellers are not limited. The economy is thus influenced by contributors to the economy and by the rate of demand and supply. For example, the United States of America is a capitalist nation, but the American government is still controlling moral businesses, fair trades, monopolies, government programs etc. as there is no true free market economy exist in the world. The major advantage of the market economic system is the separation of government and the market. As a result, the government is less powerful and gives some power in the hands of private institutions and businesses. Theoretically, a market economic system empowers a nation to experience a high degree of growth. Businesses create profitable goods and services in the free-market economy and offer private businesses a lot of incentives. There is an immense opportunity of innovation in the free market economic system because businesses invest a lot in research and development. Competition, on the other hand, leads to inequality and there is a risk that businesses will only think for profits and neglect elderly or disabled people. Monopolies will exploit consumers, and economic development would become a priority over social and human needs. Adam Smith was an 18th-century teacher and philosopher who is widely regarded as the father of classical economics. He wrote the seminal work, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ in 1776. Smith formulated the idea of an 'invisible hand' which claims that individuals will often act in their self-interest, left to their own devices, and those interests will inadvertently balance out to achieve the best result for all. Smith believed that labor, specifically the division of labor through the specialization of tasks, was the key to prosperity.

Command Economic System

A command economic system is often referred to as a socialist or communist system. It is directed by a single centralized power such as government, which controls all activities of this type of economic system. The government has the right to make all decisions about the economy. It is responsible for determining the type of goods produced and the quantity of goods produced. The price of the products in the market is also determined by the government. The government owns everything from the industrial processes to equipment. Countries like China, Cuba, and North Korea are the practical examples of a command economic system. These economies are often referred to as planned economies, since all economic plans are controlled by the government and nothing is elected by the free market. In a command economic structure, there is no competition among the sectors, and in all businesses and segments, the government has a monopoly. No competition will lead to a lack of innovation because the need to take risks is not found by industries. The laws and regulations implemented by the government must be followed by all businesses and sectors. One of the major challenges facing these governments is creating opportunities for workers and providing goods and services at affordable rates. Most of the command economies focus on resources like oil. Due to their inflexibility and centralized design, command economies have slow development. Karl Marx was a philosopher, author, social theorist, and an economist (1818-1883). He was considered as ‘the father of socialism or communism’. In 1848, he wrote ‘The Communist Manifesto’. Marx believed that in the capitalist economy, the drive for profit by business owners would force worker wages to levels of ‘subsistence’ and that they would be abused. He said that, eventually, in a revolution, exploited workers will work together and overturn capitalism. This would replace capitalism with socialism. He believed that production would be centrally organized in this system, and the distribution of the products produced would be ‘to each according to its contribution’.

Mixed Economic System

A mixed economy is a combination of market and command economies. In comparison to the command economy, the government has less interference. Industries run the economy in most common countries, with strict government control in particular areas such as public transportation and public goods and services. Most of the western economies are considered mixed economies. In such economies, neither government nor the private sector can manage the whole nation. Private businesses will, thus, operate more effectively. The government may, however, intercede in order to take care of any business failures. The government, for example, has the power to demolish a business if the monopoly is exploited. Another example is that taxes on harmful substances like tobacco and alcohol are imposed by the government. The government is responsible for developing health care and social security services in mixed economies. In addition to all this, the government uses taxation policies to minimize inequality and fairly distribute income among its citizens. However, there are still few who agree that government over-interference is not good and another common concern is that government-run businesses become uncompetitive and cause government losses and debt formation. Eduard Bernstein was a German social democratic theoretician and politician, member of the SPD, and founder of evolutionary socialism or reformism proposed a form of mixed economy, claiming that a mixed public, cooperative and private business system would be essential for a long period of time before capitalism would grow into socialism on its own.

Conclusion

So, in this essay we have analyzed in detail the concept of economic system, as well as examined its main types, with a detailed analysis of the advantages and disadvantages of each of them.

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Economic System and Its Main Types. (2022, September 01). Edubirdie. Retrieved May 26, 2024, from https://edubirdie.com/examples/economic-system-and-its-main-types/
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Economic System and Its Main Types [Internet]. Edubirdie. 2022 Sept 01 [cited 2024 May 26]. Available from: https://edubirdie.com/examples/economic-system-and-its-main-types/
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