The economic system and its function

Durga Prasad gautam 

The economic system is a social structure that allows people to support themselves. It is made up of all the people who work together to produce and use goods and services, including individuals, families, households, farms, businesses, industries, banks, and the government.

Similar to the term “politics,” the term “economic” is frequently used to refer to specific aspects of human behavior. These behaviors include producing, distributing, and consuming goods as well as the idea of being frugal with resources (such as the truth). Modern definitions concentrate emphasis on how such conduct, as well as the institutions in which it occurs (such as homes, businesses, governments, and banks), are concerned with satiating human needs and wants through converting resources into goods and services that society consumes. ‘Economic scarcity’ is thought to be the environment in which these processes occur.

The link between a society’s demands and wants and the resources available to meet them is at the center of the economist’s concept of “scarcity.” In summary, economists contend that although needs and wants are frequently limitless, the resources that can be utilized to fulfill those needs and wants are scarce. As a result, no society ever has the ability to meet all of its actual or potential requirements. The underlying premise is that both individual and societal needs and wants consistently outweigh the resources available to meet them, as evidenced, for example, by governments’ inability to provide instant health care, the best roads, education, defense, railways, and other services at a time and location that is convenient for the user.

Every dollar spent on the health service is a dollar that is not spent on some other public service, for example. Economists refer to this sacrifice as the “opportunity cost” or “real cost” of the decision that is made, and it is one that is experienced by individuals, organizations (including firms), governments, and society alike.

From a societal perspective, the existence of economic scarcity raises three major issues with resource use:

1. What should be done with the resources at hand? That is, in the “guns v. butter” debate, what products and services should be produced (or not produced) given the available resources?

2. What’s the best way to utilize those resources? Using what strategies and methodologies, for instance, in what combinations?

3. How should the products and services that they produce be distributed? Who receives what, how much, and according to what criteria?

In reality, these issues are typically resolved in a variety of ways, such as barter (voluntary, bilateral exchange), price signals and the market, queuing and rationing, government instruction, and corruption (e.g., resources allocated in exchange for favors), and instances of each of these solutions can always be found in the majority, if not all, societies. However, one or more main approaches to resource allocation typically tend to predominate, allowing for analytical differentiation across various types of economic systems. One key distinction is between centrally planned economies and those that primarily rely on market forces, with prices acting as the integrating mechanism. Understanding this divide is essential to examining how company operates.

The majority of important production-related decisions are made by a central planning body, typically the state and its agencies, in this sort of economic structure, which is similar to the communist post-second world war economies of Eastern Europe, China, Cuba, and other places.

In accordance with this system, the state usually:

  • sets output targets for businesses that are primarily under state ownership and/or control;
  • directs resources in an effort to achieve these predetermined targets;
  • seeks to coordinate production in such a way as to ensure consistency between output and input demands.
  • owns and/or controls the major economic resources.

All economic decisions may not necessarily be made at the central level in a centrally planned economy; in many instances, decision-making may be delegated to subordinate organizations, including local committees and businesses. However, in the end, these organizations answer to the center, which also maintains general control over the economy and regulates the use of limited productive resources. It goes without saying that the challenge of coordinating inputs and output in a modern planned economy is one that requires a variety of state planners and a central plan or blueprint that often spans several years (for example, a five-year plan). As part of this strategy, the state planners would set annual output goals for each sector.

Free-Market System:

This economic system operates on the Laissez Faire principle, which states that the least Governmental or other outside forces interfering. If there is any government, its main responsibility is to ensure that the economy operates freely by removing barriers to open competition.

Following are some characteristics of a free enterprise economy:

  • Those who acquire and possess the means of production are the sole owners.
  • Both consumers and businesses enjoy the freedom of choice; consumers can choose what they want to consume, and businesses can choose what they want to produce;
  • Private gains are the primary driving factor and principle for conducting economic activity;
  • There is intense rivalry in both the commodity and factor markets; • The factor owners have the freedom to choose their occupation, meaning they are free to employ their resources in any legitimate business or occupation; and


  • The level of government meddling in private sector businesses is at its lowest. People should be aware that the government is actually only supposed to perform the traditional functions, namely legal representation, law enforcement, some financial institutions, and public utility services.

A Mixed Economy:

A mixed economy is one in which both public and private economic systems are present. It is intended to incorporate beneficial aspects of both socialism and free market economies. One with both a “public sector” (the government economy) and a “private sector” (the private economy) is known as a “mixed economy.” The governmental sector has characteristics of a socialist economy, whereas the private sector has those of a free enterprise economy.

It is crucial to point out that the majority of modern economies have two different types of mixed economies.

  • Mixed Capitalist Economies:

A combination of the free enterprise economic system has a variation known as the capitalist economy. The highly developed countries like the United States, United Kingdom, France, Japan, etc. belong under this group. Despite having relatively substantial government sectors, these economies’ private sectors operate under the principles of the free enterprise system. The government is crucial in maintaining the capitalist mode of production, ensuring fair competition in the markets for goods and services, and constructing the necessary infrastructure to support private sector economic activity.

  • Mixed Socialist Economies:

The nations that have adopted the “socialist pattern of society” and economic planning as a means of growth and social justice (such as India) as well as the former communist nations (such as Russia and China) that have recently undergone significant economic reforms and liberalized their economies for private enterprise belong to the category of mixed socialist economies. The governments of these nations assume control and regulation of the private sector operations in accordance with the goals of the plan.

( principal at Arya Academy Nagarjun-4 ,Ktm)

Leave a Reply

Your email address will not be published. Required fields are marked *