The economy of a society is the method by which goods and services make their way through the population. The type of economy that a society uses depends on its level of technological advancement, population, trade relations with other societies, and level of natural resources. Three main types of economic systems exist in the modern world. Although students learn the three systems are capitalism, communism and socialism, this is incorrect.
A society that has limited technological advancement and is still primarily a subsistence society employs a traditional economic system. Subsistence systems focus on the production of survival necessities such as food. Excess is used for commercial transaction. Traditional economic systems rely on inheritance to pass down skills. Members of a traditional economy provide the services their parents and grandparents did. The distribution of wealth and possessions depends on the individual's standing in society or on cultural customs. Also, traditional economies may rely on a barter system, in which one good or service is exchanged for another, rather than a universal currency.
A market economy relies solely on the needs and wants of the consumer population. Three factors influence the development of a market economy: supply, demand and competition. Supply and demand vary inversely to one another; high supply means low demand and vice versa. Competition influences the drive to produce goods and services of higher quality or lower cost.
The government has little control in a market economy; this policy is known as laissez-faire. Capitalism is an example of a market economy system. The United States and most developed nations follow a market economy.
A command economy is the opposite of a market economy: in a command economy, the governing body controls the majority of wealth and resources, distributing it among the population accordingly. Communism is an example of a system that relies on command economy. In a communist society, the government owns and controls the wealth and resources. Socialist governments, such as those in the European Union, allow private possession of wealth and businesses, but place limits on prices.
A mixed economy is an economic system that takes elements from all three main economic systems into practice. For example, few economies fall purely under the market system or under the command system; instead, the relationship is a sliding scale rather than a choice between the two systems. Even market economies can maintain elements of traditional economies via family-owned and operated businesses.
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