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Distribution of Resources: The 4 Types of Economic Systems Explained

Distribution of Resources: The 4 Types of Economic Systems Explained

Economic systems are set in their ways, though they can work differently from each other. Knowing which system is in place makes it easier to figure out who is supposed to get what.

The different types of economic systems are defined by how scarce resources are redistributed to the rest of the economy. So what are the different types of economic systems and how do they work?

Traditional Economic System

This is the oldest type of economic system in the world, hence why it’s called traditional. The economy is closely tied to farming, so it is mostly used in countries that are rural in nature.

In this kind of economic system, a surplus of resources would be very rare. This is because each person in the system would have an assigned role that is very specific. However, the traditional economic system is very closely-knit and are self-satisfied, though they do lack technology and advanced medicine.

Command Economic System

The large part of an economic system is controlled by a centralized power, such as a central government. Through this kind of system, the centralized power is in control of planning and the distribution of resources, as well as the industries that create those resources.

The advantages of this kind of system include providing jobs to just about everyone, the focus is on the good of society rather than the individual, and prices for resources are kept affordable. The main disadvantages are that demands are difficult to calculate so it can be difficult to ration, and there is no innovation since only the most important jobs are funded.

Market Economic System

It is the firms and households that determine how resources get allocated, what is produced, and who buys the goods. After all is said and done, the central command of the economy gets to keep all the profits instead of redistribution. No government intervention is involved; market and government are kept separate in order to prevent the latter from becoming too powerful.

The advantages of the market economic system are that consumers pay the price that they want, and businesses only provide goods and services that are considered profitable. This creates an incentive for constant innovation in order to produce better products for customers. A few disadvantages include not focusing on demographics who can’t produce the most profit, such as the disabled and the elderly.

Mixed Economic System

A mixed economic system combines the other types of economic systems together, usually a cross between market and command economy. The market is pretty much free to do what they want, except in some specific sectors such as defence and transportation.

The advantages of a mixed economic system include less government intervention in some sectors while still stepping in to prevent monopolies from occurring. A disadvantage of this kind of system is that state-run industries are often subsidized and end up going into debt because there is no competition in the market.

Most economic systems in the world follow the mixed economic system, since it’s the one that works best for everyone.

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