Economic Systems: Definition, Types & Examples

Economic Systems: Definition, Types & Examples
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  • 0:01 What Is an Economic System?
  • 0:40 Planned Economies
  • 1:18 Market Economies
  • 2:12 Mixed Market Economies
  • 2:47 Lesson Summary
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Lesson Transcript
Instructor: Katryn Stewart

Katryn has a Masters degree in Management, has been PHR certified, and has taught college business and human resource management courses.

In this lesson, you'll learn about the three major forms of economic systems, including planned, market, and mixed market economies. You'll also explore the five factors of production and the roles they play in the exchange of products or services.

What is an Economic System?

Economic systems are the means by which countries and governments distribute resources and trade goods and services. They are used to control the five factors of production, including: labor, capital, entrepreneurs, physical resources and information resources. In everyday terms, these production factors involve the employees and money a company has at its disposal, as well as access to entrepreneurs, the people who want to run companies or start their own businesses. The physical materials and resources needed to run a business, along with the data and knowledge companies use to be successful, are also factors in production. Different economic systems view the use of these factors in different ways.

Planned Economies

A planned economy is one in which the government decides how the factors of production are used. For example, the government determines who owns the businesses, who buys and sells to whom, and who makes the ultimate decisions regarding businesses, including who works for them. Communism is a primary example of a planned economy in that the government makes all business decisions and handles all factors of production. In a communist country, the government decides if you're going to college and chooses your field of study; they can also designate you as a laborer. In this type of economic system, you'd have very few free choices.

Market Economies

A market economy is the opposite of a planned economy. In a market economy, people decide on their own how to utilize the factors of production. They can choose from whom they buy, for whom they work, and what businesses they own and operate. If you want to invest your own capital or be an entrepreneur and start your own company, you're free to do so. A market economy, also known as a capitalistic or free market economy, relies on capitalism, free enterprise, and freedom of choice.

While the United States has a market economy in that its citizens can usually make their own choices, such as what they do with their resources, some of these choices come with provisions. For example, in the United States, Americans cannot buy certain products, like alcohol and tobacco, unless they are of a certain age. Although citizens of the United States can choose their carriers or providers, they must purchase car insurance and health insurance.

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