Economic
Systems
“An economic system is the structural
framework in which households, businesses and governments
undertake the production and consumption decisions that
allocate limited resources to satisfy unlimited wants and
needs.”
Source: www.amosweb.com
When dealing with economics, the following
three questions need to be answered:
Different nations
answer these questions differently based on their economic
system. There are often ideologies
and
political structures that determine the economic
system that a nation uses. There are four general
categories of markets: traditional economies, command (centralized)
economies,
market (decentralized) economies and mixed economies.
Let’s
look at some of these systems.
-
Traditional economy is an economic system within which decisions
are based on customs, beliefs,
religion, habit, etc. Such a system is
generally characterized
by simple
production methods and limited exchange.
-
A command
economy or centrally planned economy is an
economic system within which decisions
are made
largely
by an authority,
such as a monarch or government planning agency.
A
socialist economy refers
to a system where the government makes production
decisions.
A planned economy is one where
the state controls the decisions
as to what will be produced.
- A
market economy, also known as a free
market economy,
is an economic system that has
the following characteristics:
private ownership of goods and the
factors of production, freedom of individuals
to make economic
choices,
the use of prices to allocate resources
and a limited economic
role for government.
A capitalist economy has entrepreneurs or business men and women who bring
together the factors
of production to make and distribute
goods and services.
The motive
is often money.
- A mixed economy is a
mix of systems that includes both private and state-owned
enterprises.
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