The world’s economic systems fall into one of four main categories: traditional economy, market economy, command economy and mixed economy; however, there are unlimited variations of each type. An economic system must define what to produce, how to produce it and for whom to produced it. Depending on the products produced and the environment, certain economic strategies will be more successful than others.

A traditional economic system is one in which each new generation retains the economic position of its parents and grandparents. Traditional economies rely on the historic success of social customs. South America, Asia and Africa support some traditional economies of thriving agricultural villages. Tradition decides what an individual does for his living, so industry, clothing and shelter are the same as in previous generations.

Market economies are based on consumers and their buying decisions rather than under government control. Market trends and product popularity generate what businesses produce. The producers choose how to make products based on the most economically sound decision: that might mean machine labor to save costs or human labor for specific skills. The buyers decide who gets which products by what they are willing to pay for what they want.

Complete market economies do not utilize price controls or subsidies and prefer less regulation of industry and production. Market decisions rely on supply and demand for pricing. Government’s role is to create a stable economy for the market to operate properly.

The market system relies on many factors to ensure its success. The profit motive or incentive for a financial reward for enterprise stimulates production. Information regarding available products and services needs to be available to producers and consumers. Producers use the information to set accurate prices and procure supplies at the lowest cost. Price relates directly to the costs and benefits of product creation and use and required profit.

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In a command economy, the government controls all economic activity. One example of a command economy is communism. In a government-directed economy, the market plays little to no role in production decisions. Command economies are less flexible than market economies and react slower to changes in consumer purchasing patterns and fluctuations in supply and demand.

A mixed economy combines qualities of market and command systems into one. In many countries where neither the government nor the business entities can maintain the economy alone, both sectors are integral to economic success. Certain resources are allocated through the market and others through the state. Theoretically, this system should be able to combine the best policies of both systems, but in practice the proportion government controls and response to market forces varies. Some countries rely more on market emphasis and others on state planning.