What are the Elements of an Economic System?
Traditional economic systems have these common elements:
- Consumers — individuals and organizations that want products
- Supply — producers make product available
- Demand — consumers want a product and are willing to pay for it.
- Money — a medium of exchange which is used as a universal exchange of value
- Loans — the concept of lending money to others at a cost
- Interest — which is a cost for using money that is not your own — the cost of borrowing money
- Central banks — which control the supply of money, and to a limited degree, control the cost of money through regulation of interest rates.
- Inflation — a process by which the fiat value of money decreases over time
- Regulators — a system by which all elements of the economic system are subject to some level of control and regulation by a central government. The regulators make sure that the “rules of the game” are enforced.
- Assumption of rational behavior in pursuit of self interest — it is assumed that all the players in an economic system attempt to act in a rational manner to the betterment of their own self interest.
- Information flow — it is assumed that information flows throughout a system, though in most systems, information flows are uneven, imperfect and in many cases delayed.
- Finite resources — in all systems, there is a finite amount of resources, and thus scarcity is a common element in most economic systems.
These elements are “theoretical” or “assumptions” that are either explicit or implicit in every economic system, whether it be capitalism, socialism or communism.