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What Is the Difference between a Traditional and Market Economy?

By S. Ejim
Updated May 16, 2024
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A traditional and market economy are different types of economies that are defined by the methods applied by the members of the society. Traditional economies are largely underdeveloped economies that are characterized by the use of primitive equipment and crude methods. A market economy is more defined and developed. This type of economy is largely based on the laws of demand and supply to the exclusion of government interference.

The difference between a traditional and market economy can be seen in the manner in which economic activities under both types of economic systems are carried out. Traditional economies are remnants of prehistoric economies that were defined by a kind of subsistence living. In such an economy, members of the society usually depend on customs, traditions and inheritance to guide economic activities. Traditional economies can be found among indigenous populations that largely depend on agriculture for their living. Market economies are mostly found in more developed societies.

This difference between a traditional and market economy is further elaborated by the manner in which the societies that have traditional economies approach the issue of production. In such societies, the question of what to produce is guided by the available resources. To this end, if there is a lot of land, the members of that society might depend on agriculture. If the abundant resource is water, then the society might depend largely on fishing. This is unlike the market system, in which there are many production choices as a result of targeted efforts by the members of the society to utilize different resources to increase the choice of goods and services that are available to consumers.

Market economies are differentiated from other economic systems by the fact that the government usually abstains from manipulating the economy to a large extent. Governments usually try to intervene in other types of economic systems through methods that include increasing or decreasing interest rates to encourage or discourage spending. The fact that the market economy is dependent on the principles of demand and supply is another differentiating factor between a traditional and market economy.

In a market economy, the prices of goods and services are determined by the demand or lack of demand for such items. When the demand is higher than the available supply, the value of such items will naturally increase. The value of such items will drop of their own accord when the demand for them decreases or when the supply outweighs the demand.

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Discussion Comments

By SteamLouis — On May 12, 2013

@fify-- I think there is a general misunderstanding that a country can only have a traditional, command economy or a market economy but that's not true. Many countries, including the US, has a mixed economy.

We have components of all three of these systems. Supply and demand determines prices, there is private property and lots of room for innovation. The government doesn't control the system but still regulates as necessary and encourages tradition.

By fify — On May 12, 2013

@ddljohn-- Both systems have their advantages and disadvantages. I think that the major advantage of a traditional market is that the society only produces what they need to consume, not more, not less. So there is no unnecessary production and wastage of resources.

For example, there are many African countries right now that only produce coffee beans and nothing else. They obviously don't live on coffee beans but produce it because there is a huge global market for coffee and thus this is the most advantageous and valuable commodity for them. But these countries often lack the most essential foods and resources the people need to survive.

This would never happen in a traditional economy. These countries would produce only the amount of coffee they intend to consume in addition to other foods that they need.

By ddljohn — On May 12, 2013

Does the traditional economy system have any advantages over market economy? Or is it always disadvantageous?

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