Types of Economy System- Report

I
Markets are strategic places where buyers and sellers interact in any economic setting. The
importance of markets in the general economic well-being is of much significance. Countries had
originally opted for centrally planned economies have now started shifting towards market economies.
In a market economy, unlike in a centrally planned economy, the decisions regarding what and how to
produce are made by individual firms and organizations. In addition, firms also make decisions
regarding who to hire and what skills to look for in a worker. On the other hand, the worker decides
what skills to acquire, when to work, their asking wage and when to quit work depending on one’s
preference. Having made the decisions, the market forces of demand and supply interact in the market
place to produce an equilibrium market price and quantity
In a market economy, everyone is always busy pursuing their own selfish and personal needs to best
of the ability. Firms always strive to maximize profits subject to the various markets and cost
constraints. On the other hand, consumers are always striving to maximize their utility subject to their
budget constraints. In the long-run, no one actually cares about the overall societal well-being. Market
economies have taken some characteristics of a perfect competitive structure with many buyers and
sellers as well as the profit and utility maximizing aspects of firms and households. Despite the
concerns on societal well-being, the markets economic structure has proven to be effective and quite
productive over the years.
The Classical economists argued that in their interaction, firms and household act in a way that
suggest they are directed by an invisible hand to produce the most desirable economic outcomes for
the society at large. As earlier mentioned, the price level yielded as a result of the market interaction
of the forces of demand and supply reflect the cost of actual cost of production(marginal cost) as well
as the value that the society has attached to that particular commodity (marginal benefit).
Further, the Classical Economists argued that if the government or any other regulatory body tries to
control the market price of a commodity, the principle of the invisible hand is violated and as such
there may be more escalations in the economy other than the corrective mechanism that the
government intended to impose. In a free market economy, the market adjusts naturally to solve any
shortcoming. The entrance of a regulatory body causes further rigidities in the market.
Socialism on the other hand is an economic system where most of the resources and factors of
production are owned by the state. Key decisions regarding what to produce, how to produce and