Types of Economies

An economy is a collection of people combined with the resources (time, energy, land, knowledge, etc.) they rely on to produce the goods necessary to live and flourish. In this blog, we'll delve into the different types of economic systems and how they shape our societies and the way we interact with resources.

In This Article:

• Different Types of Economic Systems and What They Mean
• What Is a Market in Economics?
• Pros and Cons of Different Types of Economies
• Build a Career in Economics at GCU

Different Types of Economic Systems and What They Mean

Economists classify economies based on how resources are allocated between different uses and how the goods that result from those resources are distributed. In all economies, individuals are interdependent. How I use my resources impacts what is available for you, and everything I consume was produced by someone else using resources that I do not personally control.

The main difference lies in how people interact and how their decisions are coordinated among each other; do people answer to direct commands or plans from above or do they make their own decisions based on their own individual circumstances of time and place, as described by the economist Friedrich Hayek.¹

The main three types of economies, or ways of allocating resources for society, are traditionally categorized as follows:

Planned or Command Economy

In a planned or command economy, all the resources available to the economy are allocated among different uses by some single authority (usually a government) according to a predetermined plan created by that authority. This authority could be democratically elected, though these types of economies tend to also have centralized political power. Importantly, individuals can only make decisions about how to use resources to the extent to which that is allowed for by this central plan.

Market Economy

In a market economy, there is no overarching, predetermined plan. Resources are entirely privately owned by individuals and businesses and those resources are bought and sold by those individuals and businesses in markets; those actors make their decisions purely based on their own goals and interests in response to prices determined by competition for buyers and sellers in each market. In these types of economies, each actor in the market decides what to do with their own resources, but those decisions are all coordinated with one another by prices.

Mixed Economy

Within a mixed economy, essentially all economies in the modern world include some aspects of both planned and market economies. These economies differ in the extent to which they rely on one or the other method of allocating resources. Economies exist on a spectrum, with some leaning more toward market allocations of resources and others relying more on the government to allocate resources.

What Is a Market in Economics?

A market is a group of buyers and sellers of a good who buy and sell that good according to a market price. This market price is based on how buyers and sellers compete with each other. Buyers will try to get the lowest price and sellers will try to sell for the highest price they can.

A remarkable idea, going back to Adam Smith, seen as the father of economics, is that even though no individual in a market is thinking about how resources are used by society as a whole, prices guide them to change their behavior in a way that allocates those resources in a coordinated way. Buyers will only end up buying something if the cost (in terms of other goods they could have bought) is worth it to them, and sellers will only produce and sell something given their resources if they can get more from it than they could have gotten elsewhere. This idea is called the invisible hand and is one of the most important ideas in economics.²

Pros and Cons of Different Types of Economies

Which economic system is preferred over another is mostly based on one’s underlying values; what circumstances and outcomes matter to an individual based on their beliefs and worldview.

Economists typically distinguish between two guiding objectives about how resources should be used: 

• Efficiency — making sure that, given your resources, the maximum amount of benefits, according to some metric, are achieved
• Equity — which people benefit from the use of different resources and whether those benefits are distributed in a “fair” manner

Planned economies are often based on predetermining who benefits from a specific use of resources and are aimed at minimizing risk and avoiding what are seen as potentially “unfair” outcomes. This can potentially come at the cost of efficiency; planners usually know less than what every individual in society knows when added together. Since a market allows individuals to respond to prices in a way that makes sense to them given their own circumstances, the prices end up more effectively responding to those circumstances than any planner could.

Additionally, market economies preserve some degree of individual freedom. If I disagree with a planner, I don’t have many options, whereas a market allows me to buy and sell as I choose in response to the prices I can receive or pay. It’s important to remember that in a market, how much freedom or options you have depends on the income you receive by selling your individual resources and what options other people have chosen to provide you with given their own resources. There’s no way for one person to get whatever they want at no cost, regardless of the system.

What Types of Economic Systems Are the “Best”?

I think it’s safe to say that most economists today tend to think neither a pure planned economy nor a pure market economy is ideal, meaning they favor a mixed economy. That said, economists tend to favor markets for most uses of resources since they preserve room for people to make their own decisions about how they buy and sell. They incorporate more information (in the form of prices) into each decision than any one single planner could reasonably utilize.

This also means that economists tend to think that the government should limit itself to acting in one of two situations, often called “market failures”:

• Externalities — where the production of some good creates some benefit for someone who does not directly pay for it or imposes some cost on someone else without paying for it. In that case, relying on the market price to coordinate the use of resources will mislead buyers and sellers as to the actual costs and benefits of the decisions they make.
• Market power — where some individual buyer or seller (or organized group of buyers or sellers) controls the market price and therefore manipulates the price to their own benefit at the expense of everyone else.

Build a Career in Economics at GCU

Currently, in the U.S., we are mostly a market economy, particularly when it comes to labor and jobs. That means that workers get to choose their jobs based on their values and circumstances and on the prices they can receive. As such, living in a market economy allows individuals to pursue careers in fields based on new ideas and technologies without relying on a central authority to make those decisions ahead of time.

Our economics program at GCU aims to help students understand:

• The basic principles of economics (how societies and individuals use resources to receive benefits from them and how to improve those decisions based on your values)
• How to utilize those principles in a way that incorporates the broader Christian mission and worldview

Our economics graduates can gain the discernment and awareness necessary to use their resources and gifts in a way that benefits both themselves and others. They can aspire to operate as the servant leaders and policymakers they are called to be by their creator.

Our programs are designed to equip these students with experience in actually utilizing these principles of economics, by engaging in cost-benefit analysis and building models to analyze the implications of different decisions.

The Colangelo College of Business works to stay at the forefront of connecting students with the jobs and careers of the future. Our economics program is built around connecting students to opportunities to utilize economic concepts, models and tools to make better decisions in a business and public policy context. 

About the Author

Dr. Alexander Theisen, a native of the valley, has served as a full-time instructor in economics at GCU for three years. He earned his Bachelor of Science in Economics at Arizona State University before going on to receive his master’s and PhD in Economics at Northwestern University. Recent projects of his have involved studying the incentive structure of peer-to-peer solar energy markets and the possible workforce impacts of AI. He currently lives in Scottsdale with his wife Liz and daughter Lucy.