Economy: Its Definition & Types, and System
November 27, 2016
By Tara Shwan
Economy: Its Definition & Types, and System
An economy is a system of organization and institution that either facilitate or play a role in the production and distribution of goods and services in the society.
Economy determines how resources are distributed among the member of society and they determine the value of goods and services. And they even determine how and what sort of things can be treated for those good and services. How a society structures its economic system is largely a political and social issue.
The political and legal structure of the society will govern how wealth can be accumulated, and how wealth can be distributed and the manner of competition permitted between different participants in the economy.
Economic system follows in to one of two categories:
Market system and Command system
Market system: in a market system individual people own the factors of productions land, capital and labors, and they can do whatever they want to do. The US Economy is a market economy. The individual in the Market system economy are able to bargain their labor for wages and use their properties as they see fit. And they can engage in any economic activity as long as they are legal. In the market system the law of supply and demand governor the economic.
Command system: is an economic system were economic decision making is centralized and usually in the hand of the State. The government control the factors of production and make decision about what to produce, how much to produce and to whom it's produced.
In theory the idea is that all productions and distributions directed towards socially desirable goals. Examples of command system the current Chines economy.
There are three big economic systems:
Capitalism, Socialism and Communism
Capitalism: is a market based economic system where individuals own all resources. In pure capitalism the only role of government is to enforce the rules of market place preventing illegal activity from destabilizing the economy and to protect the property right of individual.
Since the Capitalism is a Market System individual control the factors of production the land, the labor and the capital. They determine, produce, how much is produced and who gets what's produced, the law of supply and demand and the wealth of individual determine these factors. Products are produced and available who can afford the price. The market is driven by each individual social interest.
United States economy is a pure example of the Economic System.
Socialism: A socialist Economic system is characterized by social ownership and democratic control of the means of production, which may mean autonomous cooperatives and direct public ownership, wherein production is carried out directly. In a socialism factors of productions are owned equally by everyone in the society, and the ownership can be through different types. It could be a cooperative, or democratically elected government. It could also be a public corporation where everyone in the society has share of stocks.
Example: top 10 Socialism systems are: China, Denmark, Finland, Netherlands, Canada, Sweden, Norway, Ireland, New Zealand, and Belgium.
Communism: it's also known as a command system is economic system where, the government owns all means and factors of production, and decides the allocation of resources and what products and services will be provided. And also control all business. It's also a political and economic ideology based on communal ownership and the absence of class. Communism can be thought of as capitalism's opposite. All communists are socialists, but not all socialists are communists.
Mixed economy: Germany and Russia are example of mixed economy.
Factors of Production:
Resources required for generation of goods or services, generally classified into four major groups:
- Land (including all natural resources),
- Labor (including all human resources),
- Capital (including all ma-made resources), and
- Enterprise or organization (which brings all previous resources for productions).
These factors also classified also as management, machines, materials, and money.