Elements of an Economic System

Elements of an Economic System

Economic systems mainly deal with the relationships between production (supply) and consumption (demand). What is being produced has to be consumed and what is being consumed has to be produced. Four elements define production:

  • Regulation. The way the production system is controlled and regulated, such as taxation, incentives, and standards (e.g. labor laws). Mostly the role of governments, but increasingly of international multilateral agreements.
  • Manufacturing. Transformation of materials into intermediate and finished goods.
  • Distribution. Activities that link the elements of the production system making goods and services available to the consumer. Includes transport and communications as well as retailing.

With the emergence of logistics, manufacturing and distribution are increasingly embedded. Further, all these elements, especially manufacturing, are using inputs for their processes, also known as factors of production. They include land (including natural resources), capital, and labor. The enterprise itself is often considered as the fourth factor as its main purpose is the organization of the other factors of production.