_Different Economic Systems

Tags: #cb2/01/02

The classification of economic systems

the classification of economic system depends on how much the government controls the
economy: the extent to which government decides 'what', 'how' and 'for whom' to produce

Types of Economics Systems:

Command Economy
Free-market Economy
Mixed-market Economy

Links to other topics:

Interdependence of goods and factors

Price Mechanism

Useful Definitions:
Centrally planned or command economy:

An economy where all economic decisions are taken by the government.

Free-market economy:

An economy where all economic decisions are taken by individual households and fi
rms and with no government intervention.

Mixed economy :

An economy where economic decisions are made partly by the government and partly
through the market. In practice all economies are mixed.

Informal sector:

informal sector includes wide range of activities conducted by individuals or businesses

that are not officially registered or recognized by the government
Participants in the informal sector often lack legal protections, social security, and may
not pay taxes
Developing countries have more informal sector compared to developed countries
Subsistent production:

Subsistence production Where people produce things for their own consumption.

Input–output analysis:

This involves dividing the economy into sectors where each sector is a user of inputs
from and a supplier of outputs to other sectors. The technique examines how these
inputs and outputs can be matched to the total resources available in the economy.

Note: To understand the following definitions, refer to Price Mechanism

Price mechanism

The system in a market economy whereby changes in price in response to changes in

demand and supply have the eff ect of making demand equal to supply.

Equilibrium price

The price where the quantity demanded equals the quantity supplied: the price where
there is no shortage or surplus.

Equilibrium

A position of balance. A position from which there is no inherent tendency to move

away.

Note: For more information about the following definitions, refer to Mixed-market
Economy

Mixed-market economy

A market economy where there is some government intervention.

Relative price

The price of one good compared with another (e.g. good X is twice the price of good Y).