Economic Systems
3 Major Economic Systems
Economic Systems:
There are 3 major mainstream economic systems, and they are:
1) Market economy
2) Mixed economy
3) Command economy.
The distinction between them stems from their approach to answering the 3 basic economic questions:
1) What to produce?
2) How to produce it? 3) How to distribute it?
❖ Market economy: o All economic resources are owned by the people. o They decide how and where to channelize those resources. o The market forces of demand and supply determine the equilibrium market price, which in turn determines profits. o This profit motive is the driving force behind the whole economy. o The government plays only a peripheral role in setting up the basic structure and rules controlling the markets. o The political counterpart of this system is called "capitalism." o Market economy believes in Laissez-faire meaning non-intervention by the government in the functioning of the economy. o The basic logic is that the scarce economic resources would automatically go into the most desirable channels, because they would be the most profitable ones based on consumer demand for those goods and services. o Consumers reign supreme in a market economy. o They act by demanding (or not demanding a good) and the producers react by producing (or not producing) that commodity.
❖ Command economy: o It is also called a planned economy. o Here the government owns all the economic resources and all the factors of production. o The government decides the answers to the 3 fundamental economic questions. o The government decides the allocation and channelization of scarce economic resources. o There is no interplay of the market forces of demand and supply and the pricing mechanism in deciding this allocation. o There is government regulation controlling almost every aspect of people's lives. o Since people do not own the economic resources, there is no place for private initiative and no incentives at
Economic Systems:
There are 3 major mainstream economic systems, and they are:
1) Market economy
2) Mixed economy
3) Command economy.
The distinction between them stems from their approach to answering the 3 basic economic questions:
1) What to produce?
2) How to produce it? 3) How to distribute it?
❖ Market economy: o All economic resources are owned by the people. o They decide how and where to channelize those resources. o The market forces of demand and supply determine the equilibrium market price, which in turn determines profits. o This profit motive is the driving force behind the whole economy. o The government plays only a peripheral role in setting up the basic structure and rules controlling the markets. o The political counterpart of this system is called "capitalism." o Market economy believes in Laissez-faire meaning non-intervention by the government in the functioning of the economy. o The basic logic is that the scarce economic resources would automatically go into the most desirable channels, because they would be the most profitable ones based on consumer demand for those goods and services. o Consumers reign supreme in a market economy. o They act by demanding (or not demanding a good) and the producers react by producing (or not producing) that commodity.
❖ Command economy: o It is also called a planned economy. o Here the government owns all the economic resources and all the factors of production. o The government decides the answers to the 3 fundamental economic questions. o The government decides the allocation and channelization of scarce economic resources. o There is no interplay of the market forces of demand and supply and the pricing mechanism in deciding this allocation. o There is government regulation controlling almost every aspect of people's lives. o Since people do not own the economic resources, there is no place for private initiative and no incentives at