Economic System

Meaning of Economic System

An economic system is a mechanism with the help of which the government’s plan and allocate accessible services, resources, and commodities across the country. Economic systems manage elements of production, combining wealth, labor, physical resources, and business people. An economic system incorporates many companies, agencies, objects, models, as well as for deciding procedures.

Types of Economic System

  • Capitalist Economy- In a capitalist system the products manufactured are divided among people not according to what people want but on the foundation of Purchasing Power—which is the ability to buy products and services. Which means an individual needs to have the money with him to buy the goods and services. The Low-cost housing for the underprivileged is much required but will not include as demand in the market because the needy do not have the buying power to back the demand. Therefore, the commodity will not be manufactured and provided as per market forces.
  • Socialist Economy- This economy system acknowledges the three inquiries in a different way. In a socialist society, the government determines what products are to be manufactured in accordance with the requirements of society. It is believed that the government understands what is appropriate for the citizen of the country, therefore, the passions of individual buyers are not given much attention. The government concludes how products are to be created and how the product should be disposed of. In principle, sharing under socialism is assumed to be based on what an individual need and not what they can buy. A socialist system does not have a separate estate because everything is controlled by the government.
  • Mixed Economic – Mixed systems have characteristics of both the command and market economic systems. For this purpose, the mixed economic systems are also called as dual economic systems. However, there is no sincere method to determine a mixed system, sometimes the word represents a market system beneath the strict administrative control in certain sections of the economy.

Central Problem of Economy

Economic System

Economic Sector

The economic sector is divided into three economic sectors

  • Primary Sector: It is that sector which relies on the environment for any production or manufacturing. Few examples of the primary sector are mining, farming, agriculture, fishing, etc.
  • Secondary Sector: In this sector, the raw material is transferred to a valuable product Few examples are construction industries and Manufacturing of Steel, etc.
  • Tertiary Sector: It is also known as Service Sector,  and includes production and exchange of services. Few examples are banking, insurance, transportation, communication, etc.

Quick Links to Explore:

Difference Between Capitalist, Socialist and Mixed Economy

Basis Capitalist Economy Socialist Economy Mixed Economy
Ownership of Property Private ownership Public ownership Both public and private ownership
Price Determination Prices are determined by the market forces of demand and supply Prices are determined by the central planning authority. Prices are determined by central planning authority and demand and supply.
Motive of Production Profit motive Social welfare The profit motive in the private sector and welfare motive in the public sector.
Role of Government No role Complete role Full role in the public sector and limited role in the private sector
Competition Exists No competition Exist only in the private sector
Distribution of income Very Unequal Quite Equal Considerable inequalities exist.
Multiple Choice Question:
Q.1 What are the central problems of an economy?
a. What to produce?
b. How to produce?
c. For whom to produce?
d. All of the above
Q.2- Which economic system is based on public ownership of property and social welfare?
a. Socialist economy
b. Capitalist economy
c. Mixed economy
d. None of the above
Q.3- Mixed economy operates with motive of __________________
a. Profit.
b. Social Welfare
c. Both (a) and (b)
d. None of the above
Q.4- In __________ type of economy there is no intervention of government.
a. Socialist economy
b. Capitalist economy
c. Mixed economy
d. None of the above
Q.5- In __________ type of economy there is no competition level.
a. Socialist economy
b. Capitalist economy
c. Mixed economy
d. None of the above
Answer Key
1-d, 2-a, 3-c, 4-b, 5-a

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