Types of Economic Systems_Ashish R Shejwal

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Technische Hochschule Nürnberg Georg Simon Ohm
Ohm Professional School
Foundations of Business Administration
Prof. Dr. Thomas Eckardt
Winter term 2020/2021
Topic – Economic systems
By - Ashish Ramchandra Shejwal, Immatriculation Nr. 3591378
Submission date - 21.02.2021

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Table of Contents
1 Introduction ....................................................................................................................................3
1.1 What is an Economic System? ................................................................................................3
2 Types of Economic Systems............................................................................................................3
2.1 Functions of any Economic System.........................................................................................4
2.2 System non-related Factors of Economic Systems.................................................................4
2.3 2020 Index of Economic Freedom ..........................................................................................5
3 Traditional Economic system..........................................................................................................5
3.1 Pros and Cons of a Traditional Economy ................................................................................6
4 Planned or Command Economic system ........................................................................................6
4.1 System related Factors in a Planned Economy.......................................................................7
4.2 Pros and Cons of a Planned Economy.....................................................................................7
5 Market Economic System ...............................................................................................................7
5.1 System related Factors in a Market Economy ........................................................................8
5.2 Pros and Cons of a Market Economy......................................................................................8
6 Mixed Economic System .................................................................................................................8
6.1 Characteristics of Market Economy in Mixed Economy (Pros)...............................................9
6.2 Characteristics of Planned Economy in Mixed Economy (Pros) .............................................9
6.3 Cons of a Mixed Economy.....................................................................................................10
7 Conclusion.....................................................................................................................................10
8 References ....................................................................................................................................11
9 Self-Declaration.............................................................................................................................12

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1 Introduction
The purpose of this study to analyse the various forms of economic systems that exist and have existed
throughout the world. There are many functions within a society but the main goal of a civilised society
is achieving well-being of citizens through economic development. Other functions like engineering,
doctor, lawyers. Architectures, etc exist to fulfil the same goal. Throughout history we see many great
civilisations which tried to successfully achieve human well-being by implementing different types of
economic systems. In the present world as well only those nations which have a good economic
system are able to develop new technologies, good education, launch space exploration missions, etc.
1.1 What is an Economic System?
Since the human beings have inhabited this world. There always exist a set of economic rules which
everyone in a civilised society sticks to. These set of guidelines or rules helps a society to control its
activities like production and consumption of goods and services. The economic problems states that
the needs of human beings will always exceed the ability of the society to produce goods and services
to satisfy these needs. And because the resources available within any society are limited, there has
to be a system which regulated the consumption of resources. Now within a economic system, this
can be either achieved by increasing technical efficiency or allocative efficiency or both.
2 Types of Economic Systems
The watershed event is the industrial revolution which began in Europe in the 1700's. Before that
time, we classify all economies as traditional.
Four basic types of economic systems 1
–
1. Traditional economic systems – The system is mainly based on the principle of traditions and
customs.
2. Planned or Command economic system – These are centrally planned and organized by one
ruling entity.
1
Boettke, Peter J. and Heilbroner, Robert L.. "Economic system". Encyclopedia Britannica, 23 Oct. 2020,
https://www.britannica.com/topic/economic-system. Accessed 20 February 2021.

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3. Market economic systems – Here the central organizing form is the market itself. Market is
controlled solely by people so in a pure market economy, the system is mainly influenced by
people themselves.
4. Mixed economic systems – This system is a mix of above systems. Consumers and markets can
make their own decisions with some government influence.
The basic questions these economic systems try to answer are known as the functions of economic
systems.
2.1 Functions of any Economic System
The five basic functions of an economic system are –
1. How much to produce – This function relates to the questions of exactly what should be the
optimum production quantities.
2. What to produce – This function relates to the decision of what is the most important right
now. Whether to produce capital goods or consumer goods, for import or for export, etc
3. How to produce – This relates to the question of what production techniques should be used
in order to achieve maximum output with low cost, etc.
4. Who consumes – This relates to determining who is going to consume the goods or services?
5. Adaptability – This relates to strengthening of economic system and taking care of whether
the system can overcome various social and economic challenges, etc.
Understanding the functions within a economic system also help in understanding the exact purpose
of any economic system. An economic system which is able to balance all the functions will be
theoretically successful in achieving the well-being of its citizens.
2.2 System non-related Factors of Economic Systems
Any business is determined by some factors which are independent from a specific economic system
and some factor which are a part of a specific economic system. System non-related factors that are
a part of any given economic system are all factors of production, fulfilling the rule of efficiency and
achieving a financial equilibrium. Every economic system consists of labor, capital, physical resources
like natural resources, capital goods, information resources.2
Using the available resources every
economy tries to apply the rule of efficiency of (Output/Input) and achieve maximum efficiency with
2
Thomas Eckardt, FBA01F Chapter1: The Business Environment, Accessed February 20, 2021.

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the available resources. And by doing so a economy tries to establish a financial equilibrium where
all the economic activities can take place sustainably.
2.3 2020 Index of Economic Freedom
It is a index that is created and published annually by The Heritage Foundation and The wall Street
Journal to measure the degree of economic freedom of countries. Below table 1 shows list of few
countries in decreasing order of their score of economic freedom,3
Key: Free (80-100), Mostly Free (70-79.9), Moderately Free (65-69.9), Moderately Unfree (60-64.9),
Mostly Unfree (50-59.9), Repressed (0-49.9)
Table 1 List of countries withIndex of economic freedom
Country Score Country Score
Singapore 89.4 Germany 73.5
Australia 82.6 Japan 73.3
Switzerland 82 France 66
United Kingdom 79.3 India 56.5
Canada 78.2 Egypt 54
Taiwan 77.1 Brazil 53.7
US 76.6 Cuba 26.9
South Korea 74 Venezuela 25.2
Israel 74 North Korea 4.2
3 Traditional Economic system
This refers to the earliest forms of economies centered around a tribe where each person had a very
specific role to fulfill in the society. The guidelines and working of such a system were mainly
influenced by customs, history and beliefs of the people. These economies depend on fishing, hunting,
farming, etc. They use goods to make a trade instead of monetary currency because there exists no
central system to regulate the flow of such a currency. Currently some examples of traditional
economies can be found in developing countries which are often a part of Africa, Asia, Latin America
3
"Country Rankings: World & Global Economy Rankings on Economic Freedom". www.heritage.org. Accessed
February 20, 2021.

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and the Middle East.4
Experts believe that every other economic system started initially as a traditional
economy so they expect remaining traditional economies to eventually evolve into command, market
or mixed economies.5
Traditional economies usually only produce goods and services they need
without any surplus. When one traditional economy trades with other traditional economy they rely
on ‘barter’. Where two groups that don’t compete with each other share their own goods with each
other. Goods from one tribe cannot be produced by another tribe so they cannot compete with each
other and hence there is no need for any other currency. Example, one hunting tribe shares meat with
other fishing tribe for fish in return.6
When the tribe starts trading goods with other types of
economies then they have to accept some currency and thus they start evolving into a more
sophisticated form of economic system.
3.1 Pros and Cons of a Traditional Economy
They are the most ecofriendly economic systems.7
Due to less number of people there is usually little
difference of opinions between members. Everyone has a very specific roles and expertise which also
contributes to lessening the disputes. They are a lot more sustainable than any modern industrial
economy. But due to high dependability on weather and nature they can be easily affected by any
changes in nature. Other market and mixed economies also consume the limited natural resource at
a very high rate, so the traditional economies are easily affected by depleting natural resources.
4 Planned or Command Economic system
A pure command economy is termed as a system where all the basic functions of a economic systems
is controlled by one ruling entity. Command economy is sometimes proposed as a way of controlling
hyperinflation. Even though centrally planned economies existed long before Nazi era, the phrase
“command economy” is derived from German word “Befehlswirtschaft” used to describe the fascist
Nazi economy.8
Instead of market forces of supply and demand, it is the ruling entity that decides not
only the quantity of goods to be produced but also who can consume those goods. Citizens have no
right at all to take any economic decision for the society or for their own self. The ruler creates the
4
BC Open Textbook. "Principles of Economics." Accessed February 20, 2021.
5
Economics & Sociology. "Traditional Economies: Innovations, Efficiency and Globalization," Page 65. Accessed
February 20, 2021.
6
Ibid., 62.
7
Ibid., 62.
8
John Eatwell, et al. "Problems of the Planned Economy," Page 58. The Macmillan Press Limited, 1990.
Accessed February 20, 2021.

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central plan and allocates the resources according to the plan. They have unlimited control over all of
the nation’s resources including labor, natural resources, capital goods, etc. Government owns all of
the businesses and creates laws and regulations on its own.
In the current age there is no example of a pure command economy. But according to 2020 Index of
economic freedom, North Korea has the lowest score of 4.2, followed by Venezuela and Cuba rated
25.2 and 26.9 respectively.9
4.1 System related Factors in a Planned Economy
Three main factors unique to a planned economy are –
1. Central economic planning
2. Rule of plan fulfilment
3. Public ownership 10
4.2 Pros and Cons of a Planned Economy
As all the functions and centrally controlled, it is very easy to mobilize large amounts of resources for
a specific task without following any laws and regulations which is relatively difficult in market or
mixed economy. The ruling entity can transform the society as they want without any restrictions. But
these economies lack innovation as the people are not encouraged to develop new technologies. As
the production is not governed by principles of demand and supply, poor planning can lead to severe
mismatch between the two.
5 Market Economic System
In a pure market economy, the production or goods and services is governed by laws of supply and
demand. Supplies are labour, natural resources and any other resources while the demand includes
purchases by individuals, government, businesses, etc. The businesses are privately owned and the
economy is driven by the competition. Businesses are free to produce whatever and how much soever
they want to produce. Government does not interfere in the economic activities. People are driven by
self-gain. Any business which is not able to compete is eventually closed down and hence market
9
February 20, 2021.
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economy tends to create income inequality and monopoly. According to 2020 Index of economic
freedom, Singapore has the highest score of 89.4, followed by Hong Kong at 89.1.11
5.1 System related Factors in a Market Economy
Three main factors unique to a planned economy are –
1. Principle of Autonomy
2. Principle of profitability
3. Private ownership12
5.2 Pros and Cons of a Market Economy
Because the production is governed by the supply and demand, the system automatically ensures that
the most demanded goods by consumers are only produced. Hence only those goods which yield a
profit and those highly paid by consumers are produced. To achieve a high profit, the businesses
automatically tend to use the most efficient way to create goods and services. This ensures highest
level of productivity. As the market is driven by fierce competition, there tends to be a lot of
innovation. Technologies are highly developed in market economies. But such a system tends to
ignore less privileged like old aged people, people with disabilities and children. Hence the income gap
between rich and poor goes on increasing in the long run as there is no government interference to
tackle the self-gain motives of human beings.
6 Mixed Economic System
These are economic systems that combine all the above-mentioned systems to achieve a balance
between the respective advantages and disadvantages by removing the weaknesses of free market
economy by certain government intervention. Majority of the developed and developing countries
throughout the world have evolved into mixed economies over time.
Following table 2 shows how degree of competition varies between a Market economy and a Planned
economy,13
11
February 20, 2021.
12
13

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Table 2 Degree of competitiveness in different situations
Characteristic Perfect
competition
Competition Oligopoly Monopoly
Number of
Competitors
Many Many, but fewer
than perfect
competition
Few None
Ease of Entry into
Industry
Relatively Easy Fairly easy Difficult Regulated by
government
Similarity of
Goods or
Services offered
by Competing
Firms
Identical Similar Can be similar or
different
No direct
competition
Level of Control
over Price by
individual Firms
None Some Some Considerable
Example Local farmer Grocery Store Auto industry Public utility
6.1 Characteristics of Market Economy in Mixed Economy (Pros)
1. Prices are determined by the principles of demand and supply. But with certain governmental
intervention to avoid monopoly and to overcome disadvantages for the underprivileged.
2. It enables private ownerships of business and is driven by self-gain motivations of owners. But
under they have to follow certain sets of rules and regulations formed by the government.
3. People are free to buy, sell, work, produce whatever they want without any restriction.
4. Interference of government is only for protecting competition from monopoly and ensuring
that every individual can enjoy access to the market.
6.2 Characteristics of Planned Economy in Mixed Economy (Pros)
1. Governmental budget outline determines priorities for well-being of its citizens and makes a
central plan.
2. Certain departments like making laws and regulations, military, international affairs, etc are
controlled by the government.
3. Government controls some of the businesses.

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4. Governments can control resources through increasing and decreasing taxes, subsidies, etc.
6.3 Cons of a Mixed Economy
Sometimes if government emphasizes too much on any above-mentioned positive aspects then it can
cause a disadvantage. For example, If government focusses too much on competition then it can
unknowingly increase the income inequality and hence less competitive can be left without any
government support. Centralised planning by government can create problem if government owned
industry becomes a monopoly or oligarchy system.14
7 Conclusion
Thus, from the above study it can be concluded that none of the economies are in their pure forms
are as efficient as the mixed economy. Even though the traditional system is highly sustainable it is
impossible to put it in practise in the current age of industrialisation and globalisation. Every economy
will or must evolve into a mixed economy in order to achieve the goal of well being of each and every
citizen. This evolving of economies into mixed economies is also because leaders of most of the
countries eventually realise that their people are best served through international trade.15
14
Paul A. Samuelson. “Economics,” Page 691. McGraw Hill Education, 2010.
15
Econlib. “Comparative Advantage,” Accessed February 21, 2021.

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8 References
Country Rankings: World & Global Economy Rankings on Economic Freedom". www.heritage.org.
Accessed February 20, 2021
John Eatwell, et al. "Problems of the Planned Economy," Page 58. The Macmillan Press Limited, 1990.
Econlib. “Comparative Advantage,” Accessed February 21, 2021
Economics & Sociology. "Traditional Economies: Innovations, Efficiency and Globalization," Page 65.
Thomas Eckardt, FBA01F Chapter1: The Business Environment, Accessed February 20, 2021
Paul A. Samuelson. “Economics,” Page 691. McGraw Hill Education, 2010
BC Open Textbook. "Principles of Economics." Accessed February 20, 2021

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9 Self-Declaration
"I assure that I have written the paper independently, have not submitted it elsewhere for examination
purposes, have indicated all sources and aids used, and have marked verbatim and analogous quotations as
such"
Ashish Ramchandra Shejwal
21.02.2021

Types of Economic Systems_Ashish R Shejwal

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