In this article we will discuss about:- 1. Meaning of Economic System 2. Nature of Economic System 3. Functions.

Meaning of Economic System:

An economic system may be defined as the sum-total of institutions and patterns of behaviour that organise economic activity in a society. In other words, it refers to the institutional and legal framework within which the people perform their economic activities.

It consists of a group of economic institutions through the operation of which the various resources – scarce relative to the needs of them – are utilised to satisfy human wants. Such a system is not the same in all countries, nor does it remain the same in a country at all times.

At present, the following broad types of economic systems are found:


(a) Capitalism,

(b) Socialism, and

(d) Mixed economy.

Nature of Economic System:

Every economic system has its own rules and regulations regarding produc­tion, distribution or exchange. These rules are not the same everywhere thus, capitalism or free enterprise economy is based on the doctrine of private property and freedom of business. But socialism, on the other hand is based on socialisation of the means of production and the organisation of production for social gains.


In spite of their differences, like the living organism, the economic systems have their birth, progress and decay. With the change in time, each system undergoes various changes. Consequently the basic features of the economic system do not always remain the same.

Functions of Economic System:

The basic function of every economic system is to provide solution to the fundamental problems faced by every community.

The main functions of the economic system are:

(a) To bring about a balance between supply and effective demand for goods and services in an optimal manner as far as possible;


(b) To determine what goods and services are to be produced and in what quantities (food-grains or defence goods, fertiliser or clothing,

(c) To allocate scarce resources among the industries producing goods and services (i.e., allocation of scarce iron ores for automobiles or among washing machines or steel utensils);

(d) To determine the best possible productive methods for the full utilisation of the resources of the society (e.g., coal to be mined by human labour or by machinery, electricity from thermal power plant or hydro-electric power plant, labour-intensive or capital-in­tensive method for farming, etc.); and

(e) To distribute the products of agriculture and industry among mem­bers of the community (i.e., distribution among the few rich or among many poor).


The above functions are performed by every economic system. But the exact manner in which they are performed varies from one economic system to another. In a free enterprise economy these are left to the profit motive and the price mechanism.

But, in a socialist society all these operations are planned and performed by the government agencies. India operates a mixed system, dividing the economy into public and private sectors. But the functions of the whole economy are controlled by the planning system either directly or indirectly.