Systems of resource allocation
Economists identify three basic types of
economic organization—i.e., systems for
determining what gets produced, how it gets
produced, and who gets what:
1. Traditional economy
2. Command or centrally planned economy
3. Market economy
1. Resources are allocated according to long-
2. Methods of production tend to be
3. Goods and services are distributed based on
community views about fairness and justice.
Command or central planning
•The planning authorities decide what gets
produced--resources are allocated according to
planning documents issued by central planning
•The “visible hand” of the planners overrides the
“invisible hand” of the market.
•Gosplan of the old U.S.S.R. is the classic example
of a central planning agency.
The Market System
•Resources are allocated though individual decision
•The market system relies on the choices made by
individuals (buyers and sellers) to allocate resources in a
socially optimal way.
•The economy is an agglomeration of markets, defined
as “groups of buyers and sellers with the potential to
trade with each other.”
•Income distribution is mainly determined by the
market value of resources owned (including labor).