Economic System

Economic system is an organized way in which state or nation allocates its resources and apportions goods and services in the national community.

An economic system is a way of answering basic questions, e.g.: what to produce, how to produce, from whom to produce.

It is important to understand how different parts of the world function economically, as the economy is one of the strongest forces when it comes to balancing political power, delivering high quality of life to people. Study of economic system also includes how various agencies and institutions are linked together, how information flows between them, and the social relations within the system.

Three broad types of economic systems are

Market Economy: All productive activities are privately owned, as opposed to being owned by state. The goods and services that a country produces are not planned by anyone. In this system consumers are sovereign. The purchasing patterns of consumers, as signaled to producers through the mechanism of the price system, determine what is produced and in what quantity. But sometimes single firm restrict their output in response to increase demand and let prices rise and this enables that single firm to monopolize the market. Given the dangers inherent in monopoly, the role of government in a market economy is to encourage vigorous free and fair competition between private producers.

Command Economy: The government plans the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold. The objective of command economy is for government to allocate resources for the welfare of the society. In pure command economy, all businesses are state owned, the rationale being that the government can then direct them to make investments that are in the best interest of the nation as a whole rather than in the interest of private individuals. But the abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs, hence dynamism and innovation are absent from command economies.

Mixed Economy: Certain sectors of the economy are left to private ownership and free market mechanisms, while other sectors have significant state ownership and government planning. Governments also tend to take into state ownership troubled firms whose continued operation is thought to be vital to national interests.

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