An economic system (Economy) is loosely defined as country’s plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems exist, each with their own drawbacks and benefits; the Market Economy, the Planned Economy and the Mixed Economy.
- Planned Economy
Planned economy also called as command economy is an economic system in which the state directs the economy. The Central government controls the industry such that it makes major decision regarding the production and distribution of goods and services. In such economies, central economic planning by the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output.
A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both. Since the economy is government directed, market forces have very little say in such an economy.
This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand.
- Market Economy
The other basic type of economy is the free market or capitalistic economy. It is an economy that has very little government control, instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development.
The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. The law of supply and demand is what drives the free market economy. Supply and demand is what sets the prices of goods and services in the free market economy. As supply goes up the prices go down. When the demand goes up the prices go up. Due to low government control, people are free to spend their money the way they want to. People can take the risk of starting their own business and losing money or starting their own business and making lots of money.
In the real world, market economies do not exist in pure form, as societies and governments regulate them to varying degrees rather than allow self-regulation by market forces.
- Mixed Economy
A mixed economy combines elements of both the planned and the market economies in one cohesive system. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country – both sectors play an important role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and socialist economic policies and often arise in societies that seek to balance a wide range of political and economic views.