Economy

1. What is economy ?
An economy is the large set of inter-related production and consumption activities that
aid in determining how scarce resources are allocated. The production and consumption of
goods and services are used to fulfill the needs of those living and operating within the
economy, which is also referred to as an economic system.
An economy encompasses all activity related to production, consumption, and trade of
goods and services in an area. An economy applies to everyone from individuals to entities
such as corporations and governments. The economy of a particular region or country is
governed by its culture, laws, history, and geography, among other factors, and it evolves due
to necessity. For this reason, no two economies are identical.
2. Types of Economy
There are 4 types of Economy, they are :
a. Traditional Economy
A traditional economy, as the name suggests, is based on a traditional approach. These
economies are based on ancient rules and are the most basic type of economy. The focus
in a traditional economy is only on the goods and services that match their customs,
beliefs, and history.Such traditional economies tend to focus primarily on agriculture,
cattle herding, fishing etc. A traditional economy will use the barter system and has no
concept of currency or money. Their economies center around their tribes or families.
Such economies believe in only producing what and how much they require. They find
no need to produce any market surplus. There is no concept of trading.

b. Command Economy
A command economy is the opposite of a free market economy. In a command
economy system, there is one centralized power, which in most cases is the government.
So the government makes all decisions regarding the economy. It will decide which goods
and services will be produced, in what quantities. The price will also be determined by
such centralized power and not by market forces.
A command economy is a characteristic trait of a communist country. Countries like
Cuba, China, and the previous USSR are practical examples of this command economy
system. Such economies are also known as Planned Economies because the government
plans all the forces of the economy, nothing is decided by the free market.
In such a planned economy there cannot be any competition. The government has
a monopoly in almost all the businesses and sectors. All businesses follow the regulations
and instructions of the government and are not influenced by the forces of the economy.
 c. Market Economy
This is the complete opposite of a command economy. A free market economy relies
entirely on the free market and free market trends. There is no involvement or interference
from the government or any such controlling power. This means there are no rules or
regulations imposed on either buyers or sellers. The entire economy is determined by the
participants of the economy and the laws of demand and supply.
Theoretically, a free market economy can show very high levels of growth. It makes
private organizations (only these exist) very powerful and influential in the country. So it
may create an imbalance of wealth and a scenario where the rich get richer and poor get
poorer.
Realistically there are no perfect free market economies in the world. Every economy
has some level of government regulation as it is necessary. Like for example laws that
prevent monopolies, or restrict production of harmful substances. Even anti-pollution
laws that affect production are a hindrance for a market economy. So in the modern world
free market is a subjective definition. Currently, the United States is considered the
epitome of capitalism. Hong Kong is also a good example of a free market economy.

d. Mixed Economy
A mixed economy is a perfect marriage between a command economy and a free
market economy. So, by and large, the economy is free of government intervention. But
the government will regulate and oversee specific sensitive areas of the economy like
transportation, public services, defence etc. Such an economy is known as a dual
economy. The best examples of such a mixed economy are India and France.
Such a mixed economy allows private businesses the freedom to operate in the
economy with minimum oversight. At the same time, the government can regulate the
economy so it does not adversely affect the public interests. Both public sector and private
sector can co-exist peacefully in one economy. It is the perfect blend of socialism and
capitalism. In fact, most economies of the world are currently considered as mixed
economies.

3. Microeconomics and Microeconomics

Economy can generally be broken down into macroeconomics, which concentrates on

the behavior of the aggregate economy, and microeconomics, which focuses on individual
consumers and businesses.
a. Microeconomics focuses on how individual consumers and firm make decisions; these
individuals can be a single person, a household, a business/organization or a
government agency. Analyzing certain aspects of human behavior, microeconomics
tries to explain they respond to changes in price and why they demand what they do at
particular price levels. Microeconomics tries to explain how and why different goods
are valued differently, how individuals make financial decisions, and how individuals
best trade, coordinate and cooperate with one another. Microeconomics' topics range
from the dynamics of supply and demand to the efficiency and costs associated with
producing goods and services; they also include how labor is divided and allocated,
uncertainty, and risk.
b. Macroeconomics studies an overall economy on both a national and international
level. Its focus can include a distinct geographical region, a country, a continent, or
even the whole world. Topics studied include foreign trade, government fiscal and
monetary policy, unemployment rates, the level of inflation and interest rates, the
growth of total production output as reflected by changes in the Gross Domestic
Product (GDP), and business cycles that result in expansions, booms, recessions, and
depressions.