However, do you know who controls this system?
Who decides what to produce? How do they decide?
As an opener, we are going to explore the system of production and consumption.
There are different types of economic systems, which includes traditional economy, command economy, market economy and mixed economy.
A traditional economy is an economic system whereby all economic decisions are based on beliefs and traditions. They follow exactly what their ancestors did before. Besides, they trade without using money, they just exchange goods. One example would be villages in Africa and South America.
A command economy is when the government makes all economic decisions and owns most of the properties. The governmental planning groups determine the prices of the goods produced, the wages of workers, etc. This system is usually used by countries with communist governments, such as North Korea and Cuba.
A market economy is an economic system in which economic decisions are affected by the changes in prices that occur as buyers and sellers interact in the marketplace. Most of the resources are owned by private citizens. In this case, economic decisions are based on free enterprise, which is the competition between different companies. There is no pure market economies in the world yet, but US is close.
Lastly, a mixed economy is a combination of command economy and market economy. This means most businesses own the resources, they determine what and how to produce, but the government regulates certain industries.
Today, many democratic countries such as UK, Canada and Mexico fall under the category of mixed economy, as there is no pure command economy or market economy systems being used today.
When a country is using a mixed economy system, they are often closer to either one of command economy or market economy, as there is no pure command economy or market economy.
Seeing it in a global context, the world operates in a mixed economy system which is closer to market economy.
In such an economic system, production and consumption is controlled by the market most of the time.
"The 'invisible hand' of supply-and-demand market forces defines what is produced, in what quantity, and at what price," says Economy Watch.
The market itself determines the prices of goods and services, and all participant can access to this information. Businesses can decide what to produce, how to produce and how much to produce, while consumers can decide what they want to purchase and at what price.
And, the big word for it is DEMAND AND SUPPLY.
Economy Watch. Market Economy. 14 October 2010. 4 December 2012 <http://www.economywatch.com/market-economy/>.
Harrisons. Economic Systems Notes. 1 March 2010. 4 December 2012 <http://www.slideshare.net/mrsharrisonss/economic-systems-notes-3308088#btnNext>.