Economic System | Functions Of An Economic System


An economic system is a structured way in which resources are allocated by a government, and goods and services are distributed within the bounds nation or a given geographic region. It requires the combination of many organizations, bodies, departments, decision-making processes, and consumption habits that make up a particular community’s economic structure. It is, therefore, a form of social structure.

How all the entities in an economy communicate is determined by an economic system. It is a lot more difficult to identify them today than it used to be. Ancient structures were relatively simple: trade was carried out using barter, and very few agreements and rules of engagement were in effect.


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Types and Functions of Economic Systems

What Are Economic Systems?

Any economic system (be it capitalist, democratic, or some other economic system) needs to work to meet societal needs because of the problem of scarcity. In view of such finite resources, it was thought that choices had to be made regarding:

  • What to produce.
  • How much of each commodity to produce.
  • How to produce it.
  • For whom to produce it for.

Every society provides some means to address its basic economic questions. The economic structure is called this body. Fundamentally, an economic system refers to the means by which decisions are taken in society involving economic variables. In this light, the economic structure of a society dictates how society reacts to its fundamental economic questions about again, what to produce, how to produce production, who to produce that output, and how, if at all, potential growth will be encouraged. 

The fundamental differences between economic systems lie in the degree to which economic decisions are taken by individuals as opposed to governmental bodies and in the degree to which the means of production are publicly or privately owned.


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Types of Economic Systems

Different types of economic systems exist. These include traditional economic systems, pure capitalism, the command/socialist economy, and mixed economic systems.


Traditional economy: 

This is the type of economy in which tribal rules or customs often govern the organization of production and distribution. This type existed mostly in the early phase of development where, for non-economic reasons, the economy is strongly connected to the social structure of the community, and people perform economic tasks.

Economic matters are largely determined in the traditional economy by social or religious customs and traditions. Women can plow fields, for instance, because that is their usual job and not because they are good at doing so. Traditional economic systems are frequently found in less developed countries, where economic progress may be impeded by them.


The command economy: 

In the command economy, the tune is called by an authoritarian central government. It operates on the guidance of those in power. In this type of economy, decisions are taken on a collective or group basis in connection with the functions of an economic system. Collective ownership of production factors is present. Perhaps some government body is the group that owns the production factors and takes decisions. A centrally planned economy is a command economy.

Typically, very little freedom of choice exists. Central planners determine the occupation of workers, the quantity of the type of commodity to be produced, and the distribution of income, plus arrangements for future economic growth. Examples of economies that are closest to ideal command economies are Cuba, North Korea, Russia, and Iran.


Pure capitalism: 

Pure capitalism is an economic system established on private ownership and individuals’ freedom to conduct their economic affairs without government or other groups interfering. In the market for commodities and resources, capitalist economic systems are characterized by a great deal of freedom of choice exercised by consumers and business companies.

Also known as the free exchange economy or market economy, the capitalist economy is. Freedom is the nature of pure capitalism. In the economic aspect of each individual’s life, there is the freedom to own property, freedom to purchase and sell, and freedom from government interference. The economy of the United States is best characterized by capitalism, even though it is not a purely capitalist economy.


Mixed economy: 

It is best to describe many economies as mixtures of capitalist and command systems. The United States and other countries that rely heavily on markets to allocate resources and distribute production are referred to as mixed capitalist systems. In most of its economic activities, the characteristics of the free enterprise system are manifested.

However, some of the mixed economy’s economic decisions are taken on a collective basis, and a government body owns some of the productive resources or goods. Both government and private decisions are significant in the mixed capitalist economic system.


Functions of an Economic System

Similar functions may be performed by economic systems everywhere. Such roles may be conventional or non-traditional. The traditional functions include, as mentioned, the following:

  • What to produce.
  • How to produce, i.e., what method of component combination to embrace in order to magnify the use of the resources.
  • For whom to produce.
  • Ways to distribute the goods and services produced.

If the system needs to make the best use of its scarce resources, economists have realized the importance of economic growth and the achievement of full employment. The non-traditional functions have become achievements of full employment and high economic growth.


Traditional Functions of Every Economic System

Every economic system’s traditional functions include the following:


What not to produce: 

The economic system often determines what not to produce when deciding on what goods to produce. For instance, the system may have problems if it wants to provide roads and recreational facilities since it may lack sufficient resources to do so at the same time.

It will be difficult for them to choose between the two. For example, roads may have to be chosen. A wide range of goods can be considered by an economic system than the other one, which is poorly endowed.


What approach to use: 

Economic processes often work to settle on a specific strategy to be used in manufacturing. Here in order to maximize the use of scarce resources by minimizing cost and increasing productivity, the economic system decides what method of factor combination should be used.

Whether to use labor-intensive or capital-intensive production methods will be involved in the decision. In a free-exchange economy, the choice will depend on the relative endowment factor and the price factor. Labor is more plentiful and inexpensive in developed nations, for example. A labor-intensive technique might be preferred.


For whom to produce: 

Another question facing the economic system is for whom to produce. The product must be generated in an environment where it would be requested and where costs would be reduced in order to get the full benefit from the scarce resources. Depending on the nature of the commodity, the unit of production may be located near the source of the raw material or the market center.


Economic system’s non-traditional functions;


Enduring economic development: 

Economic structures need to sustain growth in the economy. Due to the shortage of capital, society must know if it is expanding or decreasing its capacity to manufacture goods and services.

Ensuring an acceptable rate of growth of per capita income, the advancement of technology through the introduction of superior production methods, and better and more comprehensive education and training of the labor force and others are some of the key ways of fostering economic growth.


Ensuring full employment: 

Full employment must also be ensured by society. Economic systems are charged with ensuring that resources are not idle or unemployed when resources are scarce. Full employment is achieved in the business economy by the stimulation of demand.

In how economies answer the four fundamental questions of the economy, scarcity plays a major role. There are no finite resources, so communities need to think about what they have and how they are going to use it to achieve what they need. Scarcity is the cornerstone of all economic decisions, but when determining how much of something to produce and how to produce it, there are restrictions, it is said.


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