This is the earliest type of economies. Traditional economies existed in pre-historic age where hunter-gatherers relied on their environment to fulfil their needs, they bartered any excess meat or produce they collected. This type of economies are very rare in the modern world.
In this type of economic system, the government answers all the basic economic questions. Let’s see the typical answers to those questions by the government:
What to produce – The government decides what will and must be the needs of the citizens. The answer could be to produce only ‘Dettol’ soaps and no other variety of soaps. Citizens have no choice but to accept it.
How to produce – The government decides the method of production. A typical answer by a command economy could be to produce it in a labour intensive factory owned by the government.
For whom to produce – Again the government decides who will consume the products. Yes the answer is that the production is done for the people, so the people will use it and everyone gets the same price. Welfare is supposedly maximized.
Government controls everything. The factors of production are all owned by the state and production is done for the welfare of the state. And of course the choice of goods available to the people is much less, the people have to accept what is produced.
Market Economies is also known as capitalist economies. In this type of economic system, the questions facing the economy is answered by the forces of demand and supply. What to produce – What the customer demands. How to produce – By private companies, the companies decide the most efficient method and competes with each other to win customers. For whom to produce – The production is done for those who demand. It is for the customers willing to spend and buy it.
Everyone in a market economy acts in self-interest. The factors of production are owned by private individuals and companies. Government has a very minimal role in the production.
In a mixed economy, there are features of both the market and command economies. Some of the factors of productions are owned by the government, while others are owned by private sector. Almost all the economies today are mixed economies, however the degree of mixing varies. Some are more market oriented, while some are more towards government planning.