Economics: Part 4 - The 4 Main Types of Economic Systems (Excluding the Command System)
Traditional Economy
An example of a traditional economy can be found in the movie “Nim’s Island”. The island is set in Tuvalu, an island group nation consisting of nine coral atolls in the South Pacific Ocean
People from this island are mostly involved in traditional agriculture and fishing as sources of living
An economic system, according to Clayon (2001), describes how the economy of a particular country is organized
The problem of scarcity strengthens the need for an economic system to properly organize the utilization of productive resources
A system is also significant in answering the three economic questions, such as:
What goods and services to produce
How will productive resources be produced to produce goods and services
For whom to produce or who will get the goods and services produced
The way a society answers the three basic questions determines its economic system
A society is said to have a traditional economy when economic decisions are based on customs and traditional beliefs
It happens when people make what they have always made and do the same work their parents did
The ways and procedures have been handed down from generation to generation
For example, a father is a rice farmer, he will teach the rudiments of farming to his son, and the son will also become a rice farmer because its traditions dictate that rice should be produced
In a traditional economy, most of the time, the exchange of goods is done through barter
In traditional economies, customs and traditions answer the WHAT, the HOW, and FOR WHOM questions
The problem of production is solved by using the mechanism of culture and tradition
People are expected to follow their customs and let their elders decide on the type of production and the technology to be utilized
In this kind of economy, the allocation is based on social standing and gender. The male leaders of the community, the priests, and the elders enjoy a large share of the products in the community
Advantages of a Traditional Economy
The traditional economy is family-oriented, as skills to produce goods and services are handed down from generation to generation. The process of keeping traditions helps to keep the family units together
People in traditional economies are often nomadic. Hunting and gathering are ways to acquire food
People will just produce what they need. The surplus is a rarity in this kind of economy
The traditional economy relies merely on the barter system. Through bartering, goods for survival are being met
It is very predictable in terms of answering the questions of WHAT, HOW, and FOR WHOM, since these are determined by customs and traditions
Disadvantages of a Traditional Economy
The weakness of the traditional economy is that it tends to discourage new ideas and new ways of doing things. The word change is not a common word in this kind of society
The strict rules and regulations of the traditional society have the effect of punishing its members for simply deviating or breaking the rules
Lower standards of living and stagnation are another consequence of the traditional economy
Market Economic System
The opposite of a command or planned economy is the market economy
The answers to the basic economic questions are highly dependent on market behavior
Here, individual consumers and sellers interact to solve the economic problems
It is also referred to as a laissez-faire economy or free market. The French term laissez-faire translates to “allow them to do”, which implies a complete absence of government involvement in the economy
Since there are no unnatural barriers in all economic activities in the market economy, competition persists. Competition puts all buyers and sellers in check
In the market, the force of the invisible hand ensures that when firms maximize their profits and households maximize their incomes, they can maximize the output and income of society
Competition forces firms to adopt efficient production techniques. It also leads to innovation in both the techniques and products
Thus, the results of competition are better quality products and a variety of choices
Mixed Economic System
Economies where the major control and power are in the hands of the government, yet individual enterprise still exists, and independent choice of its people is exercised
The mixed economic system is where all three basic economic questions are addressed by both the government and private institutions in consideration of their mutual benefit
The private sector works on how the market works, and industries like the production and distribution of cellphones or pizza
The public sector (represented by the government) works on policies and regulations
The market is perfectly competitive if:
There is a large number of buyers and sellers, so that no buyer or seller is influential enough to affect the price
The buyers and sellers deal with homogeneous products. An example of this is the market for table salt. It is always the same chemical formula, which is sodium and chloride
Buyers and sellers act independently. These characteristics will ensure that sellers are competing against one another for the consumer’s peso, and consumers will also be competing against one another to get the best price for the goods and services
Buyers and sellers have perfect information about the price. The well-informed buyer will buy goods from the seller who offers the lowest price; thus, a well-informed seller will provide or match the low cost of their competitors to keep their customers
There are no barriers to entry or exit from the market. There is complete freedom in terms of starting up or exiting the industry