Economic Systems and Resource Allocation

Every society must decide how to answer the three fundamental questions of what, how, and for whom to produce. The way a society organizes these decisions defines its economic system. Economists distinguish three broad types: the free market economy, the planned (or command) economy, and the mixed economy. In practice, no real economy is a pure example of the first two; almost all are mixed, differing only in the balance they strike between the market and the state.

The free market economy

In a free market economy, resources are privately owned and decisions about what to produce and how to allocate goods are made through the interaction of buyers and sellers in markets. No central authority directs the economy. Instead, the price mechanism coordinates the countless independent decisions o