The Kinds of Economic System

Economic activity involves making choices about how scarcs resources are to be used. There are many different ways such choices may be made. These different methods from the basis of the different kinds of economic systems. The three most important systems are known as the "market economy", the "command economy" and the "mixed economy".

The Market Economy

A market economy is one in which decisions about what is produced, how it is produced and who consumes it are left entirely to individual producers and customers. This system works through the operation of markets. Markets determine the prices of things, and prices influence all production and consumption decision. Studying exactly how such a system would work is one of the major tasks of the economic analysis.

The Command Economy

A command economy is one in which all production and consumption decisions are made by the authorities. This usually means that they are made by the government. This does not imply that there must be a communist system on the lines that the Soviet Union has been run. Whenever you have government intervention in a market you have elements of a command economy. You don't necessairly have a communist system.

The Mixed Economy

These two systems, the market and the command economy, are really extreme cases. In practice no economy is wholly a market or wholly a command system. All real economies combine elements of both. Some decisions are left to the market and some made by, or at least strongly influenced by, the government.
For example, in the United Kingdom something like 1/5 of the output is controlled more or less directly by the government. This includes things like defence, law and order, health, education, roads, railways and so on. A great deal of the rest is influenced by government at least to some extent. Certain things are prohibited, such as the sale of dangerous drugs or the consumption of alcohol by minors. Others are made compulsory, such as the wearing of seat belts or crash helmets. There is a whole host of regulations regarding the use of land and buildings, weights and measures, the roadworthiness of cars, Sunday trading and a great deal more.