ECONOMIC SYSTEM

A means by which governments organize and distribute available resources, services, and
goods across a geographic region or country
Written by CFI Team
Updated May 7, 2022

What is an Economic System?

An economic system is a means by which societies or governments organize and distribute

available resources, services, and goods across a geographic region or country. Economic
systems regulate the factors of production, including land, capital, labor, and physical resources.
An economic system encompasses many institutions, agencies, entities, decision-making
processes, and patterns of consumption that comprise the economic structure of a given
community.

Types of Economic Systems

There are many types of economies around the world. Each has its own distinguishing
characteristics, although they all share some basic features. Each economy functions based on a
unique set of conditions and assumptions. Economic systems can be categorized into four main
types: traditional economies, command economies, mixed economies, and market economies.

1. Traditional economic system

The traditional economic system is based on goods, services, and work, all of which follow
certain established trends. It relies a lot on people, and there is very little division of labor or
specialization. In essence, the traditional economy is very basic and the most ancient of the four
types.

Some parts of the world still function with a traditional economic system. It is commonly found
in rural settings in second and third world nations, where economic activities are predominantly
farming or other traditional income-generating activities.

There are usually very few resources to share in communities with traditional economic systems.
Either few resources occur naturally in the region or access to them is restricted in some way.
Thus, the traditional system, unlike the other three, lacks the potential to generate a surplus.
Nevertheless, precisely because of its primitive nature, the traditional economic system is highly
sustainable. In addition, due to its small output, there is very little wastage compared to the other
three systems.

2. Command economic system

In a command system, there is a dominant centralized authority – usually the government – that
controls a significant portion of the economic structure. Also known as a planned system, the
command economic system is common in communist societies since production decisions are the
preserve of the government.

If an economy enjoys access to many resources, chances are that it may lean towards a command
economic structure. In such a case, the government comes in and exercises control over the
resources. Ideally, centralized control covers valuable resources such as gold or oil. The people
regulate other less important sectors of the economy, such as agriculture.

In theory, the command system works very well as long as the central authority exercises control
with the general population’s best interests in mind. However, that rarely seems to be the case.
Command economies are rigid compared to other systems. They react slowly to change because
power is centralized. That makes them vulnerable to economic crises or emergencies, as they
cannot quickly adjust to changing conditions.

3. Market economic system

Market economic systems are based on the concept of free markets. In other words, there is very
little government interference. The government exercises little control over resources, and it does
not interfere with important segments of the economy. Instead, regulation comes from the people
and the relationship between supply and demand.

The market economic system is mostly theoretical. That is to say, a pure market system doesn’t
really exist. Why? Well, all economic systems are subject to some kind of interference from a
central authority. For instance, most governments enact laws that regulate fair trade
and monopolies.

From a theoretical point of view, a market economy facilitates substantial growth. Arguably,
growth is highest under a market economic system.

A market economy’s greatest downside is that it allows private entities to amass a lot of
economic power, particularly those who own resources of great value. The distribution of
resources is not equitable because those who succeed economically control most of them.

4. Mixed system

Mixed systems combine the characteristics of the market and command economic systems. For
this reason, mixed systems are also known as dual systems. Sometimes the term is used to
describe a market system under strict regulatory control.

Many countries in the developed western hemisphere follow a mixed system. Most industries are
private, while the rest, composed primarily of public services, are under the control of the
government.

Mixed systems are the norm globally. Supposedly, a mixed system combines the best features of
market and command systems. However, practically speaking, mixed economies face the
challenge of finding the right balance between free markets and government control.
Governments tend to exert much more control than is necessary.

Final Word

Economic systems are grouped into traditional, command, market, and mixed systems.
Traditional systems focus on the basics of goods, services, and work, and they are influenced by
traditions and beliefs. A centralized authority influences command systems, while a market
system is under the control of forces of demand and supply. Lastly, mixed economies are a
combination of command and market systems.

POSITIVE ECONOMICS
 A fall in prices will lead to a rise in demand for own-label supermarket foods
 If the government raises the tax on beer, this will lead to a fall in profits of the brewers.
 The rising price of crude oil on world markets will lead to an increase in cycling to work
 A reduction in income tax will improve the incentives of the unemployed to find work.
 A rise in average temperatures will increase the demand for sun screen products.
 Higher interest rates will reduce house prices
 Cut-price alcohol has increased the demand for alcohol among teenagers
 A car scrappage scheme will lead to fall in the price of second hand cars
 The law of demand – “If other factors remain constant, if price rises, demand declines;
and if price decreases, demand inclines.”
 Income isn’t equal in all countries.
 When the Government levies more taxes on tobacco, people started smoking less.
NORMATIVE ECONOMICS
 The regulation of oil prices by the government helps to keep inflation in check.
 The independence of the central bank from the government should be curtailed.
 The development of Special Economic Zones is not working out.
 Progressive taxation is better than regressive taxation.
 Companies should be made to pay for the pollution they cause.
 Government should implement two child policy for population control and to reduce
pressure on our natural resources.
 Government should invest money in development of infrastructure for higher GDP
growth.
 The US Government should cut taxes for all countrymen.
 The economists of the UK mentioned that the UK would be a more capital intensive
country if it would allow more foreign nationals to build their businesses.
 Carbon emissions should be taxed at $1.00 per pound to pay for their impact on
public infrastructure from global climate change
 The minimum wage should be $15/hour to provide a living wage for a single income
household
 The United States and Brazil should open a free trade agreement to allow more fluid
commerce between the countries
 Due to the small amount of work in rural areas, there is an increase in the population
of the urban area.
 Taxes charged to millionaire families should be higher

GROUP ACTIVITY
POSITIVE ECONOMICS OR NEGATIVE ECONOMICS?
Write PE if the statement describes Positive Economics. Write NE if it describes Negative
Economics.
1. The regulation of oil prices by the government helps to keep inflation in check.
2. A fall in prices will lead to a rise in demand for own-label supermarket foods
3. If the government raises the tax on beer, this will lead to a fall in profits of the brewers.
4. The independence of the central bank from the government should be curtailed.
5. The development of Special Economic Zones is not working out.
6. The rising price of crude oil on world markets will lead to an increase in cycling to work
7. Progressive taxation is better than regressive taxation.
8. Companies should be made to pay for the pollution they cause.
9. A reduction in income tax will improve the incentives of the unemployed to find work.
10. A rise in average temperatures will increase the demand for sun screen products.
11. Government should implement two child policy for population control and to
reduce pressure on our natural resources.
12. Government should invest money in development of infrastructure for higher GDP
growth.
13. Higher interest rates will reduce house prices
14. The US Government should cut taxes for all countrymen.
15. Cut-price alcohol has increased the demand for alcohol among teenagers
16. A car scrappage scheme will lead to fall in the price of second hand cars
17. The economists of the UK mentioned that the UK would be a more capital intensive
country if it would allow more foreign nationals to build their businesses.
18. The law of demand – “If other factors remain constant, if price rises, demand declines;
and if price decreases, demand inclines.”
 19. Income isn’t equal in all countries.
20. Carbon emissions should be taxed at $1.00 per pound to pay for their impact on
public infrastructure from global climate change
21. The minimum wage should be $15/hour to provide a living wage for a single
income household
22. The United States and Brazil should open a free trade agreement to allow more
fluid commerce between the countries
23. When the Government levies more taxes on tobacco, people started smoking less.
24. Due to the small amount of work in rural areas, there is an increase in the population of
the urban area.
25. Taxes charged to millionaire families should be higher

TOTAL SCORE: _______