Economic Systems:

An economic system is basically described as specific set of principles that addresses the production, distribution, and consumption of products and services. The involved parties in the production, distribution, and consumptions processes are usually determined by or dependent on the economic system. Throughout the history of humanity, different types of economic systems have evolved because different societies have placed varying emphasis on distinctive goals and priorities as part of their efforts to obtain answers to certain economic questions. In addition, the difference in economic systems is fueled by the tendency by different societies to develop very broad economic approaches to manage their resources. One of the main reasons for the development of different economic systems is to address the challenge of scarcity. The challenge of scarcity is an essential problem that confronts individuals and nations. While there are four major types of economic systems recognized by economists, there are still huge disagreements on the system that effectively addresses the challenge of scarcity.

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Types of Economic Systems:

As previously mentioned, there are different types of economic systems that have been developed by different societies to deal with the challenge of scarcity. The four basic types of economic systems that are generally recognized by economists are & #8230;

Traditional Economic System:

A traditional economic system is basically fueled by customs and inheritance through which skills and techniques are passed down from generation to generation (“Economic Systems,” p.2). As a result of inheritance of skills and methods, the entire community works toward the realization of a common good. Moreover, individuals’ activities, the production of goods and services, and the exchange and use of resources tend to in the traditional economic system. Unlike other economic systems, the traditional economic system is not very dynamic to an extent that it’s characterized by static standards of living. This characteristic emanates from the fact that individuals do not enjoy occupational or financial mobility since their economic relationships and behaviors are predictable.

With regards to resolving resource allocation issues, community interests take precedence over the individual in the traditional economic system (“Types of Economic Systems” par, 5). As a result, people may be expected to merge their efforts and share equally in the proceeds of their labor in order to address the underlying resource allocation issues. In some cases, there is respect for certain types of private property though some limits are established by a strong set of obligations that people owe to the whole community. Since the traditional economic system places significant interest on the entire community, the government play very minimal role in governing these systems. These systems were mainly used during the pre-colonial periods and are currently found among Australian aborigines.

Command or Planned Economic System:

This type of economic system is one where resources and business activities are fully controlled by the state or government (“Economic Systems,” p.2). These activities such as the production of goods and services are determined by the central government or state because it usually owns the means of production. One of the major characteristics of command or planned economic system is that production does not necessarily reflect the demands of consumers because of governmental control and decision making. Secondly, the state or central government makes decisions on what to produce, how to produce them, and for whom to produce through its planners. Some major examples of countries with command or planned economic systems include China, Cuba, and the former Soviet Union.

In relation to dealing with resource allocation issues, such challenges are usually addressed by government planners. The government planners deal with the issues by making assumptions on the needs of consumers and the mix of goods and services. Since this type of economic system is controlled by the government, the government has three major roles. These roles include making the most economic decisions and giving economic commands, addressing the entire production process for several industries, and employing workers.

Market or Free Enterprise Economic System:

This is an economic system in which individuals and businesses have total freedom on what to purchase and produce. Therefore, the production of goods and services in this economic system is determined consumers’ demand. The first characteristic of a free enterprise economic system is that decisions regarding the production of goods and services are determined by the demands of consumers. Secondly, economic activity in this type of economic system is dependent on the consumption choices of consumers. Third the production means and processes are owned by individuals and private firms or businesses.

Resource allocation issues in market or free enterprise economic system are addressed without any governmental intervention and determined by demand, supply, and competition (“Economic Systems” p.1). Furthermore these issues are handled by the unfettered interaction of individuals and firms in the marketplace that and distribution of goods. While governmental intervention is minimal in this economic system, the government plays certain roles such as enacting appropriate laws, issuing money, and providing certain services.

Mixed Economic System:

This economic system can be described as an economy with a combination of command and market economic systems to provide goods and services for the benefit of all individuals. Therefore, a mixed economic system is an economy with a mixture of private and government ownership. The main characteristics of this economic system include the fact that most economic decisions are made by people in the market. Secondly, the government intervenes in the economy when necessary in order to ensure market efficiency.

The government intervention shows the critical roles it plays in this economic system such as preventing monopolies, increasing minimum wage, and providing welfare. Furthermore, the government ensures price stability, high level of economic growth, and balances exports and imports. Resource allocation issues are addressed by both individuals and government based on their roles in the allocation and distribution of these resources.

Factors of Production:

There are four generally recognized types of factors of production i.e. land, capital, entrepreneurship, and labor. to all natural resources associated with the production of goods and services. Land is categorized as a factor of production to demonstrate the contribution of non-human resources to production in their original, unimproved form (“Factors of Production” par, 3). This factor of production is particularly important in the productions of agricultural goods though it’s also valuable in . For instance, the government raises taxes on land as a means of increasing its revenue base in order to enhance the production of goods and services in other sectors.

The second factor of production is labor, which can generate surplus over subsistence costs across various industries at prevailing prices. Labor is a major factor of production since it’s the means with which individuals and businesses obtain profit. For example, the ability to make profit from production of agricultural goods and services is nearly impossible without labor from workers. Therefore, the main role of labor in production of goods and services is that it’s the key to making profits. Third, capital is a factor of production that covers all finances used to begin and carry out production processes and activities. In most cases, capital has been considered as finances used to purchase equipment for business activities. Capital plays a significant role in the production of goods and services since it the means with which these processes and activities are started and sustained. For instance, capital is used to purchase raw materials that are processed into finished products for use by customers. The final and recently added factor of production is entrepreneurship, which is considered as the ownership of capital. The entrepreneur is the manager or risk-taker who channels his/her finances or ideas into the production of goods and services (“Factors of Production” par, 15). Furthermore, entrepreneur acts as the innovator who seeks for new ways of creating a product or services or transforming an old product or service into a new one. For instance, a business may employ the services of an entrepreneur to improve the firm’s brands in order to meet the .


Economic systems are set of principles and guidelines that influence the production, allocation, and distribution of goods and services. There are different types of economic systems that have been developed to deal with the challenge of scarcity such as traditional, market, command, and mixed economies. The type of economic system is determined by the decisions and ways taken to produce, allocate, and consume product and services. However, the production of goods and services is also affected by various factors of production including land, capital, entrepreneurship, and labor.

Works Cited:

“Economic Systems.” Hilliard Bradley High School. Hilliard Bradley High School, n.d. Web. 18 Mar. 2013. .

“Factors of Production.” – Study Smarter., Inc., n.d. Web. 18 Mar. 2013. .

“Types of Economic Systems.” Economic Systems. Shmoop University, Inc., n.d. Web. 18 Mar. 2013. .