The way scarce resources get distributed within an economy determines the type of economic system. There are four basic types of economies; traditional economy, market economy, command economy and mixed economy.
Types of Economies
Traditional Economic System
This economic system is the most traditional and ancient type of economy in the world. Vast portions of the world still function under a traditional economic system. These areas tend to be rural, second- or third-world, and closely tied to the land, usually through farming. In general, surplus is a rare thing. Each member of a traditional economy has a more specific and pronounced role, and these societies are often very close-knit and socially satisfied.
Command Economic System
In this economic system, a large part of the economic system is controlled by a centralized power; often, a federal government. A command economy is capable of creating a healthy supply of its own resources and it generally rewards its own people with affordable prices. Example: China or D.P.R.K. (North Korea)
Market Economic System
In a free market economy, firms and households act in self-interest to determine how resources get allocated, what goods get produced and who buys the goods. There is no government intervention in a pure market economy (“laissez faire“) No truly free market economy exists in the world. For example, while America is a capitalist nation, our government still regulates (or attempts to regulate) fair trade, government programs, moral business, monopolies, etc.
Mixed Economic System
This economic system is somewhere in between a market economy and command economy. In the most common types of mixed economies, the market is more or less free of government ownership except for a few key areas. It generally has policies that are socialist and capitalist.
Capitalism: You have two cows. You sell one and buy a bull. Your herd multiples, and the economy grows. You sell them and retire on the income.
Communism: You have two cows. The State takes both of them and gives you milk.
Socialism: You have two cows. You give one to your neighbor.
Bureaucratism: You have two cows. The State takes both, shoots one, milks the other and then throws away the milk.