Economies are the systems of trade which try to solve the economic problem in their area (i.e. Nation or economic union). There are three major systems that are or have been imposed to solve the economic problem; they are the market economy, centrally planned economy and mixed economy. Despite having three types of economies, all current nations have mixed economies.
First of all, it is important to understand what the economic problem is. The economic problem is society's unlimited wants, despite having limited resources. Due to this, consumers and private firms must choose between their wants, and accordingly rank them in preference of need for the good and/or service. There are four questions that must be answered in all economies. What to produce? How much to produce? How to produce? How to distribute production?
A market economy involves all major business decisions being made by only individuals and private firms. This system is designed so that the consumer demands certain products, therefore attempting to solve the economic problem. The major factor in a market economy is supply and demand. That is, the quantity of a product and the amount of consumers who want the product. Market economies are also known as capitalist, free enterprise and laissez-faire.
A centrally planned economy is the contrast of the market economy. All decisions are made by the public sector (government). There is very little insight into what the individual wants. Centrally planned governments would allocate resources as they see fit. This economic system is designed to promote equality but rarely achieves it. Nations that have, in the past, only used this system are Russia (i.e. United Soviet Socialists Republic) and China. This system could be known as socialist or communist.