Exploring Economic Systems and Making Choices: Traditional, Command, and Market Economies

 

Economic systems are organized differently. One of them, and the oldest, is the traditional economy. In this group, we notice that society tries to be self-sufficient in production and consumption. They keep their skills and production methods internally by inheriting generations. This method nowadays is found to be used mostly among farmers. Another type of economy is the command economy. In this system, the government or the ruling power sets up the rules and objectives to be reached by the economy. They set up production goals without being influenced by business free will. What is going to be manufactured in the fabrication business, what kind of crops should be produced, and also, they make trade agreements with other countries for import exports.

This kind of economy is established today among communist countries. On the other hand, the market economy is based on business free will. Entrepreneurs produce what sells mostly. Goods manufactured or produced in agriculture, imports, and exports depend on demand and supply. The government has a minimum intervention. The US economy leans toward a market economy even though it has some rules similar to the command economy imposed on business.

In our everyday lives, we face moments where, due to scarcity, we have to choose between the goods that we need and the most important ones. If there was no scarcity, we could afford all the things we might think of. This statement stands not only for good but also for services and activities in our lives.

For example, A family of four has a budget constraint of $4,000.00 net income a month. Among their spending, they have $2,200.00 in rent, $500.00 in car spending, $200.00 phone bills, $100.00 TV and internet service, an average of $100.00 ConEdison bill, and on top of all this, they spend about $900.00 on grocery shopping. In addition to this spending, they wish to go out for dinner once a week. They also want to take a $5,000.00 vacation once a year.

In order for this family to afford other wishes, they have to give up their basic expenses. So, they might have to give up car spending in order to have enough money for dinner out and vacations. The above-mentioned choice is what the economist calls opportunity cost. From another point of view, if this family decides to give up the car payments and, with the money saved, go out every other night for dinner. The first dinner out gives much more pleasure than the other upcoming dinner out. This is what is called the law of diminishing marginal utility. So, in their best interest is to choose fewer dinner outs and have some money left for vacations.