Economic system: concept, types and features

Table of contents:

Economic system: concept, types and features
Economic system: concept, types and features

Essentially, the concept of "economic structure" should be understood as the means by which decisions are made in a society related to economic variables. In this light, the economic system of a society determines how a society answers its fundamental economic questions, again, what to produce, how to produce products, who should receive these products, and how the future growth of the state in the world market will be secured.

Significant differences in economic systems lie in the extent to which economic decisions are made by the individual as opposed to government bodies, and whether the means of production are private or public property.

economic structure of society
economic structure of society

This article will tell you what the functions of economic systems are, as well as what types of them exist.

Functions of the economic system

No matter what the economic system is, it performs a number of traditional and non-traditional functions.

The first ones include the following:

  1. Determining what needs to be produced insidestate and what not.
  2. Choice of method. Here, the economic system decides which factor combination method should be used to maximize the use of scarce resources by minimizing costs and increasing productivity. The solution may involve the use of labor-intensive or capital-intensive production methods.
  3. Determining for whom to produce goods and services. Another problem facing the economic system is deciding for whom to produce certain goods. To get the most out of limited resources, a good must be produced in an area where it will be in demand and where costs will be minimized. The production unit may be located near the source of raw materials or the center of the market, depending on the nature of the product.
features of the economic system
features of the economic system

Unconventional functions of each economic system:

  1. Sustained economic growth. Economic systems must ensure economic growth. Due to a lack of resources, society must know whether its ability to produce goods and services is expanding or decreasing. Some of the main ways to promote economic growth include ensuring an adequate growth rate of per capita income, improving technology through the introduction of better production methods, and better and more extensive education and training of the workforce, among others.
  2. Ensuring full employment. Society must also provide full employment. The challenge for economic systems is to ensure that resources are not idle or unemployed because resources are limited. In a market economy, full employment is achieved by stimulating demand.

Now, knowing about the basics of the economic system, we should consider what it can be.

Traditional economic system

The traditional economic system is the oldest type of economy in the world. This is a type of economy in which the organization of production and distribution is often governed by tribal rules or customs. This type existed mainly in the early stages of development, when the economy is closely connected with the social structure of the community, and people perform economic tasks for non-economic reasons. In a traditional economy, economic issues are largely determined by social or religious customs and traditions. For example, women may plow fields because it is their normal role, not because they are good at it.

foundations of the economic system
foundations of the economic system

To this day, there are states with this economic system in the world. As a rule, these are countries of the second or third world, closely connected with the fact that their main way of earning money is agriculture. In this type of system, a surplus (an excess of income over expenditure) is virtually impossible.

Advantages and disadvantages of the traditional economic system

Each member of the traditional economy plays a specific and distinct role, and these societies tend to be very cohesive and socially satisfied. This iscan be called a wonderful advantage, because a close-knit society is able to withstand even the greatest difficulties.

But the disadvantages of this economic system are the lack of access to technology and modern medicine. This is what affects the standard of living, which is usually low compared to other more developed countries.

Command economic system

The command economic system is due to the fact that in it the authoritarian central government sets the rhythm for the entire social life of the state. In this type of economy, decisions related to the functions of the economic system are made on a collective or group basis.

There is collective ownership of the factors of production. The group that owns the factors of production and makes the decisions could be a government agency.

economic structure of the Russian Federation
economic structure of the Russian Federation

The main feature of the economic system is planning. The employment of workers, the quantity of goods to be produced, and the distribution of income are determined by the central planners who organize future economic growth. Cuba, North Korea, Russia and Iran are examples of the economies closest to a perfect command economy.

Advantages and disadvantages of a command economic system

The advantages include the fact that with the efficient work of the entire state, almost one hundred percent employment of the entire economically active population is ensured. In addition, such an economic structure of society makes it possiblemake good use of all available resources.

The disadvantage is that the government focuses on society as a whole, but not on the individual.

Market system

A market economy or pure capitalism is an economic system based on private property and the freedom of people to carry out their economic affairs without interference from government agencies or other groups.

economic system concept
economic system concept

Capitalist economies are characterized by great freedom of choice enjoyed by consumers and commercial firms in the market for goods, services and resources. The capitalist economy is also known as the economy of free exchange.

The essence of pure capitalism is freedom. There is freedom to own property, freedom to buy and sell, and freedom from state intervention in the economic aspect of every individual's life. Capitalism is best characterized by the economy of the United States, although it is not a purely capitalist economy.

Advantages and disadvantages of a market economic system

Speaking of the benefits of this economic system, competition leads to efficiency because companies that have lower costs are more competitive and make more money. Innovation is encouraged because it provides a competitive advantage and increases the chances of we alth. A wide variety of goods and services are available as companies try to differentiate themselves onmarket.

However, there are a number of disadvantages of a market economy. First of all, it is that there is inequality in we alth and mobility because we alth tends to generate we alth. In other words, rich people find it easier to get richer than poor people. In addition, freedom in the market leads to the fact that private enterprises often harm the environment, saving on environmental safety. Another important disadvantage is that under such a system, society is deprived of social guarantees and security, since the market is determined by the personal interests of entrepreneurs, not workers.

Mixed economic system

Mixed economic system is a combination of several types of systems. In a mixed capitalist economic system, both public and private decisions matter. In other words, under this system, everyone can play freely in the economic market, but at the same time, the state does not allow it to have a negative impact on social and other components. It is worth noting that the economic structure of the Russian Federation is mixed.

economic system
economic system

Advantages and disadvantages of a mixed economic system

The advantages include the fact that there is control over the monopoly of business by the state and the protection of the rights of all participants in economic life (both entrepreneurs and workers) is ensured.

But it is fashionable to attribute the disadvantages to the fact that private business suffers frequent interference in its affairs fromstate.