Economic Systems, Meaning and Types
The methods by which individuals divide and share their resources are known as the economic systems. Read the complete blog to learn more!
Izhar Ahmad26 Oct, 2023
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Economic systems govern the management of resources like land, capital, labor, and physical assets. They encompass a wide array of institutions, organizations, decision-making processes, and consumption patterns, collectively shaping the economic framework within a specific community.
Economic Systems Meaning
An economic system functions as a mechanism through which the government or individuals strategize and distribute available services, resources, and goods within a nation. These systems oversee the production factors, merging wealth, labor, physical resources, and entrepreneurs. The involvement and importance of participants such as the government and private entities differ based on the type of economic system in place.Types of Economic Systems
Various economic system types exist. Let's briefly explore the characteristics of these systems present in the market:Traditional Economic System:
This system is rooted in the customs and traditions of a nation's people. It relies on barter and trade for survival, with cultural influences shaping production, distribution, and policies. Typically, it is heavily reliant on agriculture and is commonly found in underdeveloped and developing nations. This system is often referred to as a subsistence economy, and traces of it can still be observed in other economies.Command Economic System:
In a command economy, the government or a central authority takes charge of planning and controlling crucial economic processes. There's little room for competition and free exchange of ideas, as the government makes decisions regarding production, consumption, and investment, effectively creating a government monopoly.Market Economic System:
This system minimizes government intervention, allowing economic processes to be determined by the laws of supply and demand. It fosters free competition and the exchange of ideas, enabling businesses to pursue opportunities, innovate, and sell products at prices determined by consumers. Private entities can amass considerable power in this system, and an example of this is individual-centered capitalism.Mixed Economic System:
A mixed economic system combines elements from various economic systems. It blends aspects of market, traditional, and command economies. Many of the world's economies are shifting towards being mixed economies, especially when advocating for globalization. In a mixed economy, the private sector thrives under the influence of encouraging laws, and citizens are free to live and earn as they choose. The law of supply and demand plays a significant role in price determination, with the government having the option to implement control measures like price ceilings to protect consumers.Differences Between Different Economic Systems
The following are the differences between different kinds of economic systems:| Parameters | Market Economic System | Command Economic System | Mixed Economic System |
| Determination of Price | Prices are determined by demand and supply in the market. | The central authority, often the government, sets prices for goods and services. | Prices are influenced by market forces and government regulations. |
| Property Ownership | Property is owned by private entities. | Property is publicly owned. | Both public and private entities own property. |
| Production | Production is driven by profit motives. | Production aims at social welfare. | Production goals include both profit and social welfare. |
| Competition | There is competition among market entities. | No competition due to state ownership of firms. | Competition occurs in the private sector. |
| Government Intervention | Government involvement is minimal. | Government exercises full control over firms. | Government has varying roles in public and private sectors. |
What is an Economic Sector?
Economic sectors refer to distinct categories or divisions within an economy, each with its specific focus and function. These sectors are crucial for understanding and analyzing the various activities and industries that contribute to a nation's economic development.Types of Economic Sector
Economic sectors can be classified into the following categories:Primary Sector:
The primary sector of an economy directly engages with the environment for production purposes. Activities in this sector include agriculture, farming, mining, and fishing, among others. Its significance lies in harvesting products and extracting resources from the environment, primarily for basic food and raw materials. The primary goal is the optimal utilization of natural resources.Secondary Sector:
The secondary sector involves the conversion of raw materials into products suitable for consumption or sale. It marks a transition from primitive economic activities like agriculture. For instance, this sector aids a country in moving from agrarian practices to a more developed market. In India, the secondary sector contributes about 20% to the gross domestic product and offers substantial employment opportunities.Tertiary Sector:
The tertiary sector predominantly encompasses the service industry, focusing on service exchanges and production. Some examples include insurance, banking, communication, and transportation services. This sector's relevance has expanded owing to fast technology developments in important services such as healthcare, police, and banking. One of its primary benefits is the comparatively low entrance barrier for firms.| Read Related Topics | |||
| Features of a Company | The Value Added Method | Joint Stock Company | Foreign Exchange Market |
| Levels of Management | Sources of Business Finance | Final Goods | Settlement of Accounts |
Economic Systems FAQs
Who is the father of economics?
The father of economics is considered to be Adam Smith, a Scottish economist and philosopher, known for his foundational work in classical economics.
What are the types of economics with examples?
There are two types of economics, such as microeconomics and macroeconomics.
What type of economy is India?
India has a mixed economy, combining elements of both market and planned economies.
What is the second name of economics?
Economics is often referred to as the "dismal science."
What is micro and macro?
Microeconomics deals with individual economic units (e.g., households, firms), while macroeconomics studies the overall economy, including factors like growth, inflation, and employment.
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