The Economy

An economy is a broad collection of interconnected production, utilisation, and trade activities that help determine how scarce resources should be divided and distributed among the residents of society. Resources are produced and utilised to meet the needs of people who live and work in an economy. A country’s economy encompasses its citizens, families, communities, and the government.

The economic system is structured depending on the political and legal system. A state’s economy is guided by its tradition, practices, and constitutional rules, among other factors. It developed due to the choices, actions, and decisions of the entities participating in its operation. Due to these factors, the characteristics of two different economies are never the same.

Understanding How an Economy Works

The economy is made up of a network of markets where goods and services are exchanged with the help of capital. These networks exist on a local, national, and global level. It can take many forms, prioritise different things, and involve varying levels of government intervention. 

The concept of supply and demand is the main driving force of an economy. The economy of a country regulates the production and distribution of supplies and services among the residents based on the requirement of the residents. While high demand for a resource leads to its high price, low demand results in the low price of the resources. To be more precise, the cost of the goods, services, and human labour are fixed by the market depending on their supply and demand. The economy is largely dynamic and keeps changing as per the market trends and population growth. 

Types of Economy

An economy is broadly classified into three different types, which are as follows:

Command markets 

The state controls all factors of production in this type of economy. The government takes all the economic decisions and regulates the creation of goods and supplies. They also decide the buyers who should have access to the products. 

The main characteristics of a command or planned economy are as follows:

• Government preferences determine what is produced
• The government and their employees decide how to produce
• The government’s preferences determine who produces

Free markets

In free-market economies, rather than the government making production, distribution, and purchase decisions, the consumers and producers decide on the factors of production, which are usually based on supply and demand. 

The main characteristics of a market economy are as follows:

• Consumer preferences influence what is produced
• Profit-seeking producers determine how to produce
• Purchasing power determines who produces and for whom

Mixed markets

A mixed market exists in the middle of the spectrum. This means that there is some government intervention, usually setting boundaries within which the free market can operate. 

The main characteristics of a mixed market economy are as follows:

• What is produced is determined in part by consumer preferences and in part by government policy
• How to produce is determined in part by profit-seeking producers and in part by the government
• Who produces is determined in part by purchasing power and in part by government preferences

Role of Economy

• Production

Production is the first and most important process in any economy, and it must continue indefinitely. Production refers to any activity or provision of a service that satisfies or is expected to satisfy a desire. As a result, all consumer goods, producer goods, and services exchanged for money are included in production.

• Consumption

Consumption is the economy’s other most significant process; it is the actual purpose that defines an economy. Consumption is defined as the use of economic goods and services to satisfy human desires. As in production, all goods and services that are not paid for in their act of use are removed from consumption.

• Growth

Economic growth is the process of increasing a country’s real per capita income over time. Population growth, capital per capita growth, savings supply, and other factors influence an economy’s growth rate. The growth in the size of a country’s economy is calculated using the total goods and services produced in a country, also known as gross domestic product or GDP.

The Impacts of an Economy 

There are several ways in which the economy affects our daily lives:

• Living costs

The cost of living is strongly intertwined with the economy. It is defined as the sum of money required to cover essential expenses such as food, housing, and taxes. The inflation rate is used to calculate this cost. The purchasing power of a unit of currency decreases as goods and services become more expensive.

• Employment rates

A thriving economy will also result in higher employment rates. As more goods and services (resources) are demanded, more people are required to provide them, resulting in more job opportunities. The opposite is also true: when demand is low, fewer jobs are available.

• Government spending

The performance of a country’s economy impacts government policies and spending. Businesses’ cash flow improves as they earn more money and pay more taxes, allowing the government to invest in infrastructure and services.

• Quality of life

As a country’s economy grows, more resources become available to invest in education and healthcare. Furthermore, it implies that there are more jobs available, a poverty reduction, and an overall improvement in the well-being of the people in that economy. 

Conclusion

An economy works by allocating scarce resources to individuals and entities. Its vast network of production, consumption, and trade activities decides the growth and overall well being of a state. Since it comprises product, service, and labour markets, the economy is all around us, we all play a part in it, and the quality of our life is highly affected by the changes in the economy.