1.3 Is There an Alternative to the

Market Equilibrium

In this chapter we have discussed the elements of an economy based on
free-market transactions—what we call a market economy. Are there
alternatives to this type of economy? To answer this question we first
need to identify various types of economic systems.

Types of Economic Systems

It is helpful to distinguish three pure types of economies, called
traditional, command, and free-market economies. These economies differ in
the way in which economic decisions are coordinated. But no actual
economy fits neatly into one of these three categories—all real economies
contain some elements of each type.

Traditional Economies

A traditional economy is one in which behaviour is based primarily on
tradition, custom, and habit. Young men follow their fathers’ occupations.
Women do what their mothers did. There is little change in the pattern of
goods produced from year to year, other than those imposed by the
vagaries of nature. The techniques of production also follow traditional
patterns, except when the effects of an occasional new invention are felt.

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