Necessary and Basic Concept of Economy

The economy of a country encompasses all production, distribution, and economic activities involving people, and it is this economy that determines the country’s level of living. Due to British colonial domination, the Indian economy was in horrible health on the brink of independence.

Three main economic activities are- production, consumption and distribution of goods and services. The main aim of the economy is to determine how scarce resources should be allocated among those who are living and participating in an economy. Basically, the main object is to satisfy human wants with a limited number of resources.

Goods flow freely through the market in market-based economies, according to supply and demand.

Understanding economies 

An economy is defined as all activity in a given area that is related to the production, consumption, and trade of goods and services. These choices are made through a combination of market transactions and hierarchical or collaborative decision-making. This process involves everyone from individuals to entities such as families, corporations, and governments. The economy of a specific region or country is influenced by a variety of elements, including its culture, laws, history, and geography, among others, and it evolves as a result of the participants’ choices and their actions. As a result, no two economies are the same.

Indian Economy 

India’s economy is a developing mixed economy with a medium income. The nominal GDP of the Indian economy is 6th largest and the 3rd largest purchasing power capacity compared to other economies. India ranked 145th by GDP and 122nd by GDP, respectively, according to the International Monetary Fund.

The factors of production in an economy- The raw material or goods and services used in the production process to produce the outputs are referred to as factors of production (finished goods and services). There are primarily four production elements. Land, labor, physical capital, and human capital(entrepreneurship) are the four categories.

Important questions related to economy 

Who takes the decision to consume, produce and trade in an economy? 

Economic decisions are taken by the combination of market transactions, collective decisions, or hierarchical. From individuals to entities like, corporations, government, families all are involved in decision making. 

What is the GDP of a county? 

Total amount of goods and services produced in a country is known as the gross domestic product of a county.

Who governs the economy of a region? 

The economy of a particular region is governed by its culture, laws, history and geography. 

Types of economy 

There are three types of economies 

1. Market economy 

In a market based economy the activities of production and consumption are decided by producers and consumers. 

In such an economy individuals, businesses etc. are free to exchange goods and services through the market according to demand and supply.

Demand and supply are determined by law of demand.

2. Command based economy 

In a command-based economy the command is in the hands of the government. Central political agents control the price and distribution of goods and services in an economy. 

Supply and demand cannot payout naturally in this system. As it is centrally planned, imbalances are common. 

3. Mixed economy 

It is the combination of both economies. In this kind of economy, free- market and socialistic elements are part of the economy.

Economies of scale 

When the production in a company becomes efficient it gains some cost advantage that is known as economies of scale. To achieve economies of scale, companies can lower the cost of products and increase production. 

Examples of economies of scale

We can witness a common example of Economies of scale if we observe large market changes with independent grocers.

The large Supermarket chains have more cash and greater number of customers hence they are able to purchase a variety and a huge quantity of groceries from suppliers which will result in lowering the cost and increasing the sale compared to the independent stores. This is the reason we get benefits while doing weekly shopping at Big chain of stores rather than doing it from a small grocery store.

Different types of economies of scale

External and internal economies 

1. Anything that makes a company cut down its cost is considered as an external economy of scale. It includes tax reduction, government subsidies and an improved transportation network for high skill groups of labour. External economies of scale are dependent on the external factors which can affect the economics of scale.
2. The control of the internal economy is in the hands of the company. It can occur anytime when a company cuts costs, from buying in bulk or investing in state-of-the-art machinery for getting extra financial capital and while hiring a specialised work team.

Advantages of economies of scale 

• It increases profit
• It can reduce long- term unit costs 
• it has high ability to attract new investment 
• It provides improvised products. 

Disadvantages of economies of scale 

• the cost will increase after some point in the output 
• there is an ineffective communication of employees 
• the morale of employee reduces due to the increase in workforce

Conclusion 

The economy encompasses the production, distribution, and trading of products and services, as well as the consumption of goods and services by many agents. It is defined as a social domain that focuses on the activities, discourses, and material expressions linked with the creation, use, and management of scarce resources in general. There are three types of economy – market economy, command-based economy and mixed economy.

Economies of scale occur when a company’s production becomes more efficient, resulting in cost savings. To achieve economies of scale, a corporation can reduce product costs while increasing