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What Is Economy

An economy consists of the production, distribution, and consumption of limited goods and services through transactions between economic agents. There are several types of economies: - Traditional economies rely on social customs and traditions to determine economic roles across generations. - Market economies are based on consumer demand and business supply without government control. The profit motive drives production based on costs and prices set by supply and demand. - Command economies give the government control over all economic activity. - Mixed economies combine aspects of market and command systems, with both private sector and state allocation of resources.

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49 views3 pages

What Is Economy

An economy consists of the production, distribution, and consumption of limited goods and services through transactions between economic agents. There are several types of economies: - Traditional economies rely on social customs and traditions to determine economic roles across generations. - Market economies are based on consumer demand and business supply without government control. The profit motive drives production based on costs and prices set by supply and demand. - Command economies give the government control over all economic activity. - Mixed economies combine aspects of market and command systems, with both private sector and state allocation of resources.

Uploaded by

mohsinrauf1001
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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WHAT IS ECONOMY ?

An economy or economic system consists of the production, distribution or trade,


and consumption of limited goods and services by different agents in a given geographical location.
The economic agents can be individuals, businesses, organizations, or governments. Transactions
occur when two parties agree to the value or price of the transacted good or service, commonly
expressed in a certain currency.

TYPES OF ECONOMY

Traditional

A traditional economic system is one in which each new generation retains the economic position of its
parents and grandparents. Traditional economies rely on the historic success of social customs. South
America, Asia and Africa support some traditional economies of thriving agricultural villages. Tradition
decides what an individual does for his living, so industry, clothing and shelter are the same as in
previous generations

Market
Market economies are based on consumers and their buying decisions rather than under government
control. Market trends and product popularity generate what businesses produce. The producers choose
how to make products based on the most economically sound decision: that might mean machine labor to
save costs or human labor for specific skills. The buyers decide who gets which products by what they
are willing to pay for what they want.

Complete market economies do not utilize price controls or subsidies and prefer less regulation of
industry and production. Market decisions rely on supply and demand for pricing. Government’s role is to
create a stable economy for the market to operate properly.

The market system relies on many factors to ensure its success. The profit motive or incentive for a
financial reward for enterprise stimulates production. Information regarding available products and
services needs to be available to producers and consumers. Producers use the information to set
accurate prices and procure supplies at the lowest cost. Price relates directly to the costs and benefits of
product creation and use and required profit

Command
In a command economy, the government controls all economic activity. One example of a command
economy is communism. In a government-directed economy, the market plays little to no role in
production decisions. Command economies are less flexible than market economies and react slower to
changes in consumer purchasing patterns and fluctuations in supply and demand

Mixed
A mixed economy combines qualities of market and command systems into one. In many countries where
neither the government nor the business entities can maintain the economy alone, both sectors are
integral to economic success. Certain resources are allocated through the market and others through the
state. Theoretically, this system should be able to combine the best policies of both systems, but in
practice the proportion government controls and response to market forces varies. Some countries rely
more on market emphasis and others on state planning.
Four Elements of Economics
Economics is the study of an economy's production and consumption. Economics contains
many elements and is divided into two main branches; microeconomics is the study that
focuses on individuals and businesses, while macroeconomics studies economies as a
whole. There are four elements vital to the study of the economy

Scarcity
Opportunity Cost
Inflation
Supply and Demand
A

Scarcity
 Scarcity is a vital element in economics. Scarcity is a term that refers to people making
choices. People's needs or wants typically exceed their means; when this occurs, people
must choose what they purchase and what they choose not to purchase. This element occurs
in businesses as well; when a business chooses to purchase one product to sell, the business'
means are cut short, meaning the business cannot buy as many other products.

Opportunity Cost
 Opportunity cost is an element of economics that coexists with scarcity. This term
represents the opportunities people lose by the choices they make. When a person must
choose between purchasing two different items, for example, an opportunity cost is
involved. This element involves a person choosing to purchase the item with the greatest
value and benefit to him. Typically, people selecting items to purchase choose necessities
before wants.

,Inflation
 The element of inflation plays a major role in economics. Inflation is a rise in prices of goods
and services over a period of time. When this occurs, an economy faces effects from it that
can be positive or negative. The biggest negative impact of inflation is that the value of
money decreases; as inflation increases, people must spend more money on the same goods
and services. Inflation rates are compared to income rates; when inflation rises faster than
income, people begin having a hard time purchasing the same quantity of goods as before.
Economists study the reasons for inflation as well as its effects on the economy.

Supply and Demand


 Supply and demand deals with studying how consumers and businesses handle selling and
purchasing products. Consumers demand products and businesses supply them; businesses
try to supply the correct amount of products to meet demand, but this doesn't always work.
If a business does not produce enough, the company loses money it could have made by
selling more products. If too much is made, the company may have to sit on extra products,
thus tying up funds that could have been used for a different purpose or driving down their
prices.

Definition of 'Development Economics'


A branch of economics that focuses on improving the economies of
developing countries. Development economics considers how to
promote economic growth in such countries by improving factors like
health, education, working conditions, domestic and international
policies and market conditions. It examines both macroeconomic and
microeconomic factors relating to the structure of a developing
economy and how that economy can create effective domestic and
international growth

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