An Analysis of Economic Systems: Types, Merits, and Limitations

This essay provides an introduction to economics, beginning with Adam Smith's foundational contributions and definition of the economy. It then explores different types of economic systems, including free markets (capitalism), socialism, and communism. The essay defines each system, outlining their key characteristics and operational principles. It delves into the merits and limitations of each economic model, such as the benefits of competition and efficiency in free markets, the social equity aspects of socialism, and the simplified taxation in communism. The limitations discussed include the potential for market dominance in capitalism, the potential for reduced innovation in socialism, and the challenges of resource allocation in communism. The essay concludes by summarizing the key differences and implications of each system, highlighting their relevance in different regions of the world. The assignment is available on Desklib, a platform offering students access to past papers and solved assignments.

Running Head: INTRODUCTION TO ECONOMICS 1
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Abstract
Adam Smith is commonly known as the “father of modern economics” who helped shape
the way economics is perceived. Through his definition of economy, we can deduce the basis of
an economy, what it grows to become, and its benefits both socially and economically. Thus,
many countries in the world have adopted different types of economies. Their adoption is
dependent on a system that best suits them and their people. This paper, therefore, describes the
different types of economies available, that is, free markets, communism, and socialism, and the
benefits and limitations for each.

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Introduction
Adam Smith, one of the pioneers of modern economics had a precise description of the
economy. In his book "An Inquiry into the Nature and Causes of Wealth of Nations”, he
described economics as an individual preference to improve his or her state in life. In his theory,
the people conducting the business do not necessarily offer help but they work entirely for their
growth. However, their efforts in some way affect the economy at large. In a given society, the
business people produce to meet needs set out by the consumers. Therefore, they create the
supply and demand concept (Dupont & Durham, 2020). Supply is the quantity of output the
produces are ready to sell at various prices. While demand is the quantity of products the people
are ready to buy at various prices. Commonly, the prices decrease as the quantity of the product
demand increases. The supply chain creates an economic chain of both recovery and prosperity
and that of contraction and recession. These cycles take place in different types of economic
structures that are seen today. The types of economic systems include a free market system also
known as capitalism, socialism, and communism.
A free-market economic system is one that which the factors of production such as land,
railways, and factories are partially or completely owned by businesses or individuals. They
operate with one goal of making profits from the businesses. The owners, therefore, make
decisive decisions in their businesses. The government is partly involved in some matters such as
labor and healthcare for its citizens hence making the states not fully a capitalist state. The
citizens in this type of economic system are however entitled to some rights such as owning
private property, competition, and that of choice (Field & Field, 2017). A capitalist market
creates a free market where competition in such a market is classified into four categories.
Perfect competition is where there are numerous businesses that none is larger to direct the prices
in the market. A monopolistic type of competition is that numerous businesses produce the same

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products but are considered different by the buyers. The competition in this type can be
interchangeable between businesses and it’s difficult to enter the market due to product
differentiation. Oligopoly is a competition where fewer businesses control the market. A
monopoly happens when a single business dominates the market in production, supply, and
prices.
Socialism economic system is that which most of the businesses resources are majorly
owned by the government, and the benefits shared among its people (Bowden, 2020). A socialist
system believes that wealth ought to be disseminated and the government is responsible for this
distribution. Therefore, the government owns the majority of the factors of production. The
benefits are shared in terms of retirement and health benefits. A socialist nation has a tendency to
depend heavily on the government in the provision of various needs such as health care,
education, improved employment benefits, and other social services.
Communism, on the other hand, is an economic scheme where the government has the
overall decree in making almost all decisions concerning its economy. Therefore, the
government is in control of the factors of production, and therefore, it is more concerned with the
lives of its people when compared to socialism.
The economic systems, however, have merits and limitations that affect them. A free-
market economy has the benefit of creating a free market for both risk-takers and those who do
not (Hoover & Giarratani, 2020). Important decisions such as the quantities of goods to be
produced are made by the sellers and buyers when discussing the expenses involved in goods or
services production. A capitalist market allows for open competition between the companies in
the market. It, therefore, allows for effectiveness and efficiency in improving the quality of
products and services. It also allows for the poor in a capitalist economy to work their way to

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richness. However, this type of economy creates market dictators who determine the market
trajectories.
One of the main benefits of a socialist type of economy is that it creates a situation of
social equity. Income is pulled away from the wealthier by way of taxes and reallocated to the
less fortunate in the society through several government schemes (Kates, 2017). Examples of
these programs are education and health. Workers in these types of economies are well taken
care of when compared with those from capitalist economies. Socialism type of economy,
however, may carry away the motivation for hard work and innovativeness. A new business fails
to start and or the marketing of novel products. The system scares away the professionals as they
are heavily taxed and move to more capitalist nations where their expertise is of much value.
These types of economic systems also tax heavily private businesses and individuals to provide
for the social needs of its people.
The communism type of economy has the advantage of offering a flat tax rate. It,
therefore, offers the economy the benefit of easiness and transparency (Bowden, 2020). The
people in this type of economy need to work harder and abolishes corrupt business activities
such as black markets. This system has several disadvantages. One is that the government is
mostly in a dilemma in what to produce for its people as prices do not reflect the supply and
demand. The situation results in a shortage of major commodities in the market. A communist
economy does not promote the motivation for hard work relative to a capitalist economy.

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Conclusion
The different types of economic systems that have been discussed are applied in different
regions. The free market system which is dominant in the US is where individuals or businesses
can own the factors of production. It is however different from the other two types, socialism and
communism, where the government owns most of the factors of production. Communism is
mostly affected by government intervention more than socialism. The different types have
various advantages and limitations, and they form the basis of adoption by different countries.

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References
Dupont, B., & Durham, Y. (2020). Adam Smith and the Not So Invisible Hand: A Revision for
the Undergraduate Classroom. International Review of Economics Education
https://doi.org/10.1016/j.iree.2020.100205
Bowden, B. (2020). Economic Foundations: Adam Smith and the Classical School of
Economics. The Palgrave Handbook of Management History, 345-365.
https://doi.org/10.1007/978-3-319-62114-2_20
Field, B. C., & Field, M. K. (2017). Environmental economics an introduction. The McGraw-
Hill. http://ndl.ethernet.edu.et/handle/123456789/43102
Hoover, E. M., & Giarratani, F. (2020). An introduction to regional economics.
https://researchrepository.wvu.edu/cgi/viewcontent.cgi?article=1003&context=rri-web-
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Kates, S. (2017). Free market economics: An introduction for the general reader. Edward Elgar
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