Types of Economies

What is Economics:

  • In simple terms, economics is the study of ‘what to produce,’ ‘how to produce,’ and ‘for whom to produce.’
  • It can also be defined as the study of using ‘scarce/limited resources’ to satisfy ‘unlimited wants’ of people.

What is an economy:

  • An economy is a complex system of interrelated production, consumption, and exchange activities that ultimately determines how resources are allocated among all the participants.
  • An economy may represent a nation, a region, a single industry, or even a family.
  • No two economies are identical as each are formed according to its own resources, culture, laws, history, and geography.

Types of Economic Systems

Economic systems can be categorized into four main types, viz.

Traditional Economic System:

  • This economic system retains essential characteristics in which there is a very little specialisation or division of labour.
  • It relies a lot on interpersonal relationships and follow certain established trends.
  • In essence, the traditional economy is very basic and the most ancient of the four types.
  • While traditional economic systems can have several benefits, their antiquated model can also present several potential drawbacks.


  • Rarely any surplus in goods or resources.
  • Community members are generally more satisfied in social roles.
  • Absence of total economic hierarchy results in a lack of economic competition.


  • Antiquated methods of distribution.
  • Lack of growth and technology development.
  • Reliance on localized resources and services inhibits globalization.
  • Less focus on industrialized production and more focus on agricultural processes.

Command Economic System:

  • Command economic system is also known as a planned economy and are common amongst communist nations.
  • Command-based economies depend on a central government that controls the production levels, pricing, and distribution of goods.
  • Ideally, centralized control covers valuable resources such as gold or oil.
  • The people regulate other less important sectors of the economy, such as agriculture.
  • Command economies can be beneficial for creating sustainability, however, there are a few potential drawbacks to this type of system.


  • Creates potential for mass mobilization of necessary resources due to government control.
  • Creates additional jobs for community members and citizens due to increased mobility of resources.
  • Focuses on benefits to society over individual interests.
  • Encourages more efficient use of valuable resources.


  • Creates scarcity due to an inability to plan for individual needs.
  • Forces government rationing due to inability to calculate demand on set prices.
  • Eliminates market competition, resulting in a lack of innovation and advancement.
  • Inhibits employees’ freedom to pursue creative jobs and careers.

Market Economic System:

  • Market Economies are also known as Capitalist Economies.
  • The government exercises little control over resources, and it does not interfere with important segments of the economy.
  • Instead, regulation comes from the people and the relationship between supply and demand.
  • The idea for a free-market economy comes from the works of the 18th century Scottish Economist Adam Smith titled “An Inquiry into the Nature and Causes of the Wealth of Nations.”
  • He believed that the constant tug of supply and demand allows a market economy a tendency to naturally balance itself.
  • Hence there is little to no need for government interference in the economic sphere.
  • While market economic systems can benefit emerging businesses and sole proprietorships, there are some potential disadvantages to using a free-market economic system.


  • Provides incentive for innovative entrepreneurship.
  • Gives consumers a choice in goods, services and purchase prices.
  • Creates market competition for resources, resulting in quality offerings and efficient use of resources to produce goods.
  • Inspires research, development and advances in goods and production of goods.


  • Highly competitive markets can cause a scarcity in resources for disadvantaged individuals.
  • Potential for monopolizing of industries and niches, such as technology, health care and pharmaceuticals.
  • Can increase income disparity by placing focus on economic needs over societal, community and human needs.

Mixed Economic System:

  • A mixed economic system combines the features of both socialist and free-market economic systems.
  • Most of the countries today have a mixed economic system with the existence of both public services as well as private industries.
  • Supposedly, a mixed system combines the best features of market and command systems.
  • However, practically speaking, mixed economies face the challenge of finding the right balance between free markets and government control.
  • In reality even the United States could be considered a mixed economy.

While mixed economies are fairly common around the world and offer many benefits, they also can have some weaknesses:


  • Allows for private companies to operate more efficiently and reduce operational costs because of less government oversight
  • Creates an outlet for market failures through allowing certain government intervention
  • Enables governments to create net programs like social security, health care and food and nutrition programs
  • Gives governments power to redistribute income through tax policies, reducing income disparities


  • Government intervention can be too frequent or not frequent enough, creating an imbalance
  • Creates potential for government subsidiaries within state-run industries
  • Can cause subsidized government industries to go into debt with a lack of competition in state-run industries