The four basic economic systems that exist in the modern economy include Centrally Planned Economy, Market Economy, Mixed Economy and Traditional Economies.
1. Centrally Planned Economy
Also called command economy is one where all economic decisions are made by the government.
The government decides what to produce, how it is to be produced and how it is to be allocated to consumers. This involves a great deal of planning. Planned economies tend to be run by governments who, in theory at least, want to see greater economic equality between consumers.
By state planning, goods and services can be produced to satisfy the needs of all the citizens of a country, not just those who have the money to pay for goods.
2. Market Economy
Also called a free-market economy is one where decisions are made through the market mechanism.
The forces of demand and supply, without any government interference, determine how resources are allocated. What to produce is decided upon by the level of profitability for a particular product. Buyers cast their spending votes in the market place.
How production should be organized is equally determined by what is the most profitable. Firms are encouraged through the market mechanism to adopt the most efficient methods of production.
For whom production should take place, production is allocated to those who can afford to pay. Consumers with no money cannot afford to buy anything.
3. Mixed Economy
It is one where some goods and services are produced in the free-market sector of the economy, but others are produced by the state, i.e. it is mixture of a pure free-enterprise market economy and a pure command economy.
Some resources are allocated via the market mechanism and some via the state.
4. Traditional Economies
It is one where there is little specialization and little trade. People tend to live in family groups, and these families grow most of their own food, make their own houses, gather their own fuel and provide their own leisure activities, i.e. to a great extent they are self-sufficient.
It is a traditional economy because it is the type of economy that has existed all over the world since man began being economically active. What, how and for whom to produce are decisions that are answered by looking to the past. If a society has managed to survive for some time, then what was done in the past must have been successful.
No two traditional economies are the same, so it is impossible to describe typical economic mechanisms by which resources are allocated.
