Understanding Economic Systems

Several fundamental types of economic systems exist to answer the three questions of what, how, and for whom to produce: traditional, command, market, and mixed.

• Traditional Economies: In a traditional economy, economic decisions are based on custom and historical precedent. For example, in tribal cultures or in cultures characterized by a caste system, people in particular social strata or holding certain positions often perform the same type of work as their parents and grandparents, regardless of ability or potential.
• Command (Centralized) Economies: In a command economy, governmental planning groups make the basic economic decisions. They determine such things as which goods and services to produce, their prices, and wage rates. Cuba and North Korea are examples of command economies.
• Market (Decentralized) Economies: In a decentralized market economy, economic decisions are guided by the changes in prices that occur as individual buyers and sellers interact in the market place. As such, this type of economy is often referred to as a price system. Other names for the market system are free enterprise, capitalism, and laissez-faire. The economies of the United States, Singapore, and Japan are identified as market economies since prices play a significant role in guiding economic activity.
• Mixed Economies: There are no pure command or market economies. To some degree, all modern economies exhibit characteristics of both systems and are, therefore, often referred to as mixed economies. For example, in the United States the government makes many important economic decisions, even though the price system is still predominant. Even in strict command economies, private individuals frequently engage in market activities, particularly in small towns and villages.
• The key point to remember is that every individual and every society must contend with the problem of scarcity. Every society, regardless of its political structure, must develop an economic system to determine how to use its limited productive resources to answer the three basic economic questions of what, how, and for whom to produce.