Definition
An economic system is the set of institutions and rules a society uses to decide what gets produced, how it is produced, and who receives it. Every society faces the same basic problem of allocating scarce resources, and the economic system is its chosen answer.
Systems differ mainly in how much they rely on markets versus central direction, and in who owns the means of production. They range from market economies, through mixed economies, to centrally planned command economies.
Why it matters
How it works
In a pure market economy, decentralized decisions by buyers and sellers, coordinated by prices, determine resource allocation. In a command economy, a central authority makes those decisions through plans and directives. In practice, no economy is purely one or the other. Market economies still rely on governments to enforce contracts, provide public goods, correct market failures, and redistribute income, while planned economies often allow some markets. The mixed economy, where markets do most of the allocating but the state sets rules and provides a safety net, is the dominant arrangement, and debates over economic policy are largely arguments about exactly where to draw the line.