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Every society must answer three questions: what to produce, how to produce it, and who gets the output. An economic system is the set of rules and institutions that answers them. In a traditional economy custom decides; in a command economy a central authority decides; in a market economy prices formed by voluntary trade decide. Most modern economies are mixed, relying mainly on markets while government sets rules, provides some goods, and redistributes income.
Take one concrete good, such as bread, and trace how each system would decide how much to bake, with what methods, and who eats it. Then compare the information each decision-maker needs. This makes the planner's information problem and the role of price signals visible before students meet supply and demand.
Scarcity means a society cannot produce everything everyone wants. So it must choose. Economists group those choices into three questions. What should be produced, and how much of each good? How should it be produced, with which mix of workers, machines, and land? For whom is it produced, meaning who gets to consume the output? An economic system is the set of institutions a society uses to answer these questions.
In a traditional economy, custom answers them. People farm the crops their parents farmed, use inherited methods, and share output by long-standing rules. Such systems can be stable, but they change slowly when conditions change.
In a command economy, a central authority answers them. A planning agency decides how many tractors and how much grain to produce, assigns inputs to factories, and sets prices and wages. The Soviet Union ran its economy this way for decades through its state planning committee. Planning can mobilize resources quickly toward a few goals, such as heavy industry. Its weakness is information. To plan well, the agency must know what millions of consumers want and what thousands of factories can make at what cost. That knowledge is scattered. Friedrich Hayek made this argument in his 1945 essay "The Use of Knowledge in Society."
In a market economy, prices answer the questions. If many people want bread, its price rises, which tells bakers to bake more and draws flour toward bread. Firms choose production methods that keep costs low because they keep the profit. Output goes to those willing and able to pay. Adam Smith, writing in 1776, described how self-interested trade can produce socially useful outcomes, an idea often called the "invisible hand." Markets still need rules: property rights, enforced contracts, and money.
In practice, almost every country runs a mixed economy. Markets allocate most goods, but government provides national defense and roads, regulates pollution and safety, and taxes some people to support others. Debates between countries mostly concern where to set that balance. The rest of this course studies how markets work, starting with supply and demand, and then where they fall short.