Economic System: Concept, Elements, Types & Economic Circuit
Economic system
The economic system is the way in which economy is organized, it’s a set of parts or components and actions, linked to each other, that contribute to the economic situation of a society. All the activities of the economic process are carried out within a given society, with given structures that make up what is called the economic system.
The economic circuit and economic system are related concepts, one is the set of elements that make it up, and the circuit represents their interactions. The economic circuit and system are the basis for understanding the economic universe and its operation, which is addressed below.
Contents
Elements of the economic system
The economic system is made up of the following elements:
- Goods and services.
- Economic activities.
- Factors of production (land, labor, capital, entrepreneur).
- Economic agents that are firms, individuals, families and the public sector.
The economic circuit or circular flow of the economy
The economic circuit, also called the circular flow of the economy, is the real interactions (of goods and services) and monetary interactions (money and securities) that occur in a market and is reflected through a simple graphic representation.
The circuit occurs as follows: In the case of free enterprise or mixed enterprise economies, families own the factors of production and offer them to companies or firms.
Then, the firms pay for them and once they have them and produce goods and services that they sell at a certain price to the families. Families pay for these goods and services with the income they previously received from the companies, as shown in the diagram below.
See more: Circular flow of the economy
Circular flow models
Models are simplified and theoretical representations of the functioning of the economy. The functioning and interactions of all these elements create a complex flow that is explained by means of models or simple graphic representations. There are different models, two, three, and four factor models.
The two-factor model is used to represent more easily the basic functioning of the economy.
The main economic systems
The main economic systems are free enterprise economy, and collectivist, socialist or centralized economy.
Elements | Free enterprise economy | Collectivist or centralized economy |
| Property | Private ownership of factors of production. | Common ownership of factors of production, abolition of private property. |
| Direction, planning | Individual, people have economic freedom and can act without more limits than those derived from the rights of others. | Centralized, the government plans the economy. |
| Mechanism | Markets. | Autonomous. |
| Distribution | Conditioned. | Planning. |
| Principles | Freedom of initiative, efficiency, and meritocracy. | Equality and social justice. |
Structures that form an economic system
1. Physical or geographic structures
- Raw materials: Soil and subsoil resources.
- Water: Seas, rivers, among others.
- Location, configuration, and relief of the soil.
- Climate.
2. Institutional Structures
- Politics: Forms of government (democratic or authoritarian) intermediate bodies (unions, associations)
- Legal: Property rights, regulation of contracts.
3. Social structures
- Social classes
4. Psychological or mental structures
- Attitudes towards life and material goods.
- Attitudes towards labor, efficiency, consumption, savings, etc.
5. Technical structures
- Elements of physical production.
- Elements of administrative organization.
Source: Godoy (1981)
See also: Systems theory of management
See also