In broad terms, an economic system is itself a derivative of a social system. Economic systems envisage different processes relative to the organization and motivation of labor, production, distribution as well as the circulation of products of human capital which range from infrastructure development to innovative technology. These are determined by political systems, cultural values, as well as environmental features around which a society exists (O'Connor 6). Economic systems are in essence defined by existing political boundaries such that the economic system of a given country is unique as a result of the difference in political institutions, the environment, and culture.
Types of Economic Systems
There are four main types of economic systems and these are; the command economic system, mixed economic system, market economic system, and the traditional economic system. In a command economic system, issues of an economic nature such as production and distribution are determined by a centrally placed institution or institutions which plan and control production and distribution (O'Connor 6). On the other hand, market economic systems are reliant on demand and supply conditions which determine what goods and services are allocated production and distribution resources as well as set prices (O'Connor 8). Demand and supply conditions essentially reflect the diverse preferences of consumers which send signals through demand curves to producers who can either increase or decrease production according to the signals received. In the market system both the producers and consumers are in essence after their own private interests.
A traditional economic system involves the application of economic practices, which are dictated by traditionally accepted customs and cultural practices (O'Connor 6). Such customs and practices determine how economic questions of productions and distribution are addressed and executed (O'Connor 6). On the other hand, a mixed economic system has features that are borrowed from other forms of economic systems. In most developed countries, mixed economic systems have been adopted, and as such the economies exhibit features of the three other types of economic systems (O'Connor 8).
Functions of Economic Systems
The main function of economic systems is to determine how best scarce economic resources can be used efficiently. Each economic system is tasked with maximizing the production of the needed goods and services for a particular country’s consumption levels (Tucker 521). An economic system, therefore, has to employ technical as well as allocate efficiency to ensure that the available factors of production are utilized with efficiency that encourages maximum output to complement the general well being of a country.
Economic systems have five broad functions targeted to ensuring there is an appropriate allocation of factors of production towards the needed goods and services as a society requires for consumption. These functions include determining what quantities of goods and services to produce, which goods and services are to be produced, methods which will be used to produce particular goods and services, targeted consumers for goods and services as well as ensuring that the economic system responds to societal changes with regard to social and technological advancements (Tucker 522).
Key characteristics, resource allocation, and the role of government in different economic systems
Each one of the four above mentioned economic systems has characteristics which essentially serve to distinguish one from another. Market based economic systems have characteristics unique from the other types of economic systems. These characteristics include; individuals have the right to own resources such as land, and capital, individuals compete to institute economic decisions, which will maximize profitability, individual freedoms are critical to the success of market economies. The basic tenets of supply and demand dictate the making of economic decisions profits are a source of motivation competition and examine the quality of goods and services produced as well as distribution channels to be applied (O'Connor 8).
On the other hand, command economies have distinctly different features compared to market economies. These features include; a central authority regulated by the government or in some instances, the government itself makes all the economic decisions determining how the available resources will be incorporated in the production of goods and services for consumption. Individual freedoms are curtailed, and change is instituted easily (O'Connor 7). There is essentially no competition as there is no profit motivation. Consumers have remarkably little choice on what they can get from the market as factories are concerned with achieving set quotas. This brings about chronic shortages since poor decisions are made with regard as to how land and factories are utilized. Examples of such economies are North Korea and Cuba where the government sets prices on all available goods and services.
In third world countries, especially in South America, Africa, Asia, and the Middle East, traditional economic systems are common. There are a number of characteristics unique to traditional economic systems and these include; cultural practices and customs dictate the manner with which economic questions are raised, and decisions towards such questions are addressed (O'Connor 6). The employment of technology in production is low, and production methods are outdated. Economic activities are carried out through ethnic units such as the family with women and men being accorded distinct economic roles.
In a mixed economic system, it is common to find that individuals and the government actively rely on each other’s input in the decision making process. Individual have the freedom to own factors of production such as land while workers and consumers are protected from unfair work and trade ethics. It is considered as the most efficient and effective economic system with regard to the provision of goods and services and an example of such economies are found in Western Europe and the US (O'Connor 8).
Free Goods and Economic Goods
The term good for economic students has a wider meaning than what the same term means to a trader. A trader understands the word good to mean a commodity such as wheat, oil, or truck. In an economic sense, the term goods is construed to services offered by workers and so on (Tucker 115).
Free goods refer to those which can be considered as gifts of nature and are supplied without the employment of labor and are virtually limitless in terms of supply. They are critical to the survival of humanity and essential to secure free goods for human sustenance. A perfect example of free goods is water more so when it is in a lake, sea, river, or as rainfall (Tucker 115). On the other hand, economic goods are scarce with regard to the present demand for economic goods. Economic goods require human resource so that they can be obtained. An example of an economic good is a house which is essential, always on demand and requires human labor to be constructed (Tucker 115).
Factors of Production
Factors of production include labor, land, enterprise, and capital which are resources necessary for the production of goods and services. Human input is referred to as labor and includes the entire workforce from directors to laborers (Dlabay, Burrow and Kliendl 569). Each human being has a level of skills competencies and qualifications which determine the value of human capital. Land is a natural resource, and it includes air, desert, mountain, valley, and sea. Capital refers to physical goods, which have been made by man to enable him to produce other goods and services. These include factories, trains, computers, and so on. Enterprise involves the original ideas of an entrepreneur who risks his or her resources to venture into the production of goods or services as well as organize the three other factors of production, land, capital, and labor (Dlabay, Burrow, and Kliendl 569).