Economic system in market economy

Economic system in market economy

Topics:

• What is an economic system? Definition and meaning
• Three main economic systems
• What is a Market Economy?
• Types of Markets

References:

• Alberto Bisin (2011) Introduction to economic analysis, Dept. of Economics NYU
• William A. McEachern (2006) Economics: A Contemporary Introduction, University of Connecticut
• Carl Menger (2007) Principles of economics, Ludwig von Mises Institute
• The economic problem and economic system https://faculty.etsu.edu/hipples/ProbSys.htm

KEY TAKEAWAYS:

• An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area.
• In a market economy most economic decision making is done through voluntary transactions according to the laws of supply and demand.
• A market economy is fundamentally one where entrepreneurs are free to control and co-ordinate productive resources in order to pursue profit by creating outputs that are more valuable than the inputs they use up, and free to fail and go out of business if they do not.
• Economists broadly agree that more market-oriented economies produce better economic outcomes, but differ on the precise balance between markets and central planning that is best to provide stability, equity, and long term benefits.

1. What is an economic system? Definition and meaning

• An economic system is an organized way in which a country allocates resources and distributes goods and services across the whole nation or a given geographic area. It is includes the combination of several institutions, entities, agencies, decision-making processes and patterns of consumption that make up the economic structure of a specific community. Hence it is a type of social system.
• An economic system defines how all the entities in an economy interact. Defining them today is much more complicated than it used to be. Ancient systems were relatively simple – trade was carried out using barter and there were very few treaties and rules of engagement.

• An economic system is the combination of the various agencies and entities that provide the economic structure that defines the social community. These agencies are joined by lines of trade and exchange goods. Many different objectives may be seen as desirable for an economy, like efficiency, growth, liberty, and equality. An economic system may involve production, allocation of economic inputs, distribution of economic outputs, landlords and land availability, households (earnings and expenditure consumption of goods and services in an economy), financial institutions, firms, and the government.

• Alternatively, an economic system is the set of principles by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources.
• The scarcity problem, for example, requires answers to basic questions, such as:
• What to produce?
• How to produce it?
• Who gets what is produced?

• Examples of contemporary economic systems include:
• Planned systems
• Free market systems
• Mixed economies
• Today the world largely operates under a global economic system based on the free market mode of production.