Types of Economies

When people in an economy come up to the question of how to allocate economic resources, three questions come to mind. The first is what should be produced? The second is how and who produces them? And the third is who should receive those goods? There are many different ways of forming an economy that will best answer the second and third questions. Those are traditional, market, command, and mixed economies. This video does a great job in explaining the differences in each.

The Circular Flow Model

Moving into the structure of the market economy in particular, we can look at it through the lens of the circular flow model. The circular flow model is a simple way to understand how money and resources move in an economy. Imagine it as a big loop where households (like families) and businesses trade with each other. Households provide labor (like working in a job) to businesses, and in return, they earn money called income. With this income, households buy goods and services from businesses, which helps the businesses make money. This flow of money keeps going around in a circle, showing how everything in the economy is connected. Here’s a great video to explain just how that circular flow model works.

If all of the transactions are a little confusing to try and memorize, don’t. Just think about this logically, first of all, who is supplying something? Who is receiving something? What market are they in? That should be enough to tell you what’s going on. In the factor market, money flows from businesses to households because workers need to be paid. The government gives out public goods no matter what, it’s what it does. When you wrap your mind around how to think more than what to memorize, economics becomes a lot easier.

Here’s another video just to reinforce the ideas in the last one.

Types of Competition

There are a lot of different ways that companies compete in an economy. These companies all try to get as much profit as possible, and participate in different forms of competition. There are two types:perfect and imperfect competition. Imperfect competition is further split into three categories: monopolistic competition, oligopolies, and monopolies. This video talks about each one, and what the most important features are of each one.

Here’s a table with all of the qualifying characteristics of the economy, as well as examples. The freedom of entry is tied to the barriers to entry, where certain markets may have natural or government-imposed limits on how/if businesses can enter. For example, lots of monopolies are able to have high barriers to entry because other firms who try to enter will lack the funds to compete with the monopoly, and it can set prices much lower to make nobody buy from the entering firm.

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