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Economic Systems
Topic Three

Previous - Tools Of Economic Analysis

Types of Economic Systems

The economy is the set of inter-related production and consumption activities that lead to determining how society’s scarce resources are allocated to satisfy its unlimited wants. The economy includes all activities related to production, consumption and trade of goods and services. The economy includes everyone from individuals to entities such as firms and governments.  The economic system is the means by which economic decisions are made in a country.  There are three main types of economic systems (also referred to as allocative mechanisms) plus the traditional or subsistence system.   

Market Economy or Free Market System

In a market economy, the government plays a minor role. Instead, consumers and their buying decisions drive the economy.  Market decisions are mainly dominated by supply and demand.   Resources are privately owned and consumers and firms make decisions based on self-interest; consumers seek satisfaction while the firms seek profits.  There is freedom of choice and the forces of demand and supply determine price and optimum quantity.  There is consumer sovereignty since consumers possess the means by which decisions are made.

Planned Economy

A planned economy is sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and prices are made by the government.  This type of economy lacks the kind of flexibility that is present in a market economy.  Consequently, the planned economy reacts slower to changes in consumer needs.  In the planned economy, there is no private sector involvement in decision-making and there is also no consumer sovereignty.

Mixed Economy

The mixed economy combines elements of both the market and planned economies.   This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country.

Traditional or Subsistent Economy

A traditional economy is defined as one that is based on agriculture, fishing and hunting and is guided by traditions and use barter instead of money.  It is sometimes called the subsistence sector.  Most people who live in this type of economy are poor.  This is a closed economy where people strive to be self-sufficient. 

Types of Sectors

There are five main sectors in the economy depending on the types of resources that are being used plus levels of authority.  These sectors are the primary, secondary, the tertiary, the quaternary and the quinary sectors.

The Primary Sector

The primary sector comprises of factors of the land and the sea. Agriculture is a primary sector industry as well as fishing.  The former produces things of the land and the latter produces things from the sea and rivers.  In addition, forestry is also another primary sector industry.

The Secondary Sector

In the secondary sector, countries take the raw materials from the primary sector and convert them into semi-finished products.  This sector can be seen as the construction, manufacturing and even the industrial sectors.  

The Tertiary Sector

The tertiary sector is very different from both the primary and secondary sectors in that, in this sector, services are provided.  The service sector is comprised of firms offering intangible goods.  The following are some of the services that constitute the tertiary sector: retail industry, hotels and tourism services, restaurants and cafes, transportation, communication, banking services, insurance services, medical services, dental services and postal services.

Quaternary Sector

The quaternary sector can be seen as an improved version of the tertiary sector.  This is so because it involves services related to the knowledge sector, which includes the demand for the information-based services.  The quaternary sector consists of intellectual activities and the services involved in this type of sector are usually outsourced.   

Quinary Sector

The quinary sector is the branch of a country's economy where high-level decisions are made by top-level executives in the government and nonprofit organizations. The quinary sector is the top economic sector. It involves highly paid professionals, research scientists and government officials.

Next - Theory Of Demand