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Types of Economy

Synopsis

Capitalist Economy, Socialist Economy and Mixed Economy are the three different types of economies in the world.

Introduction

In today’s fast-growing world, we will only find complex economies that can be further classified based on their motive of carrying various economic activities.

There are some economies whose motive is either social welfare or profit maximization. But we will also find another category of the economy for which both social welfare and profit maximization are equally important.

Let’s have a look at each type of economy one by one.

1. Capitalist Economy or Free Economy or Market Economy

As the name suggests, these economies carry on their economic activities for capital. It means their ultimate motive is profit maximization. For them, a consumer is their “KING” means they focus on the production of those goods and services which are in high demand by the consumer.

As profit is the ultimate goal, the ownership of resources is in the hands of the people which means the private sector dominates such type of economy.

In this economy, all the economic activities are regulated by the market forces means the prices of the goods and services are decided by the free play of demand and supply.

Examples –  USA, UK

What about India? 

2. Socialist Economy or Centrally Planned Economy or Controlled Economy

This economy focuses on social welfare rather than profit maximization. The Government plays a very crucial role in regulating economic activities. In this economy, those goods are manufactured which are considered necessary to save the people from hunger and starvation rather than those which will earn a huge amount of profit.

That’s why the public sector is dominating in this economy. Ownership of most of the resources is with the Government.

Even the prices of goods and services are also fully regulated by the Government.

Examples – China, Russia, North Korea (Types of Economy)

What about India? 

3. Mixed Economy

This economy is a friend to all. Both profit maximization and social welfare are equally important for this type of economy. It means there is no “King”, no “Praja”. But yes to restrict or control any kind of monopoly, the government regulates the production and prices of essential goods and services.

Here both the Government and the people enjoy the ownership of resources.

Can you guess it’s example? 

Yes. It is our lovely India where we can purchase what we want, we can produce which will earn maximum profit but yes Government permission is needed.

You must be feeling very proud to be an Indian. 

So far we have discussed all types of economies one by one. Now it’s time to have their comparative analysis. 

Differences (Types of Economy)

S. No.Basis of DifferenceMarket EconomyCentrally Planned EconomyMixed Economy
1.Also known asFree Economy or Capitalist EconomyControlled Economy or Socialist Economy
2.Who controls the economic activities?By market forces i.e. Demand and Supply forces.By the Government or some Central Authority.Governed by the market forces but are regulated by the Government.
3.Motive behind economic decisionsProfit maximizationSocial welfareBoth profit maximization and social welfare.
4.Consumer SovereigntyYes as consumer has the freedom to buy the goods of his own choice.No as the central authority decides what to produce.Yes but at the same time, Public Distribution System (PDS) ensures the availability of essential goods to the public in general.
5.Ownership of resourcesPeopleGovernmentBoth by the Government and by the people
6.Who determines the price of goods and services?Market forcesGovernmentBy the market but the price of essential goods are regulated by the government.
7.Which sector dominates the economic activity?Private sectorPublic sectorBoth public and private sector

Read More:

What is Economy?

Microeconomics and Macroeconomics

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