An economy is a political area of government action, production, distribution and exchange, and the relative exploitation of various economic agents by other agents. In economic terms, it is defined as a community or social relation that highlight the practices, politics, and material exchanges related to the creation, utilization, management and control of available resources. This relation is based on a system of values and norms that are developed by the individuals and groups involved in the economy. Economists distinguish between a market economy, the process of creating markets for goods and services, and a centrally planned economy, where centrally directed activities are assumed to yield optimum results.
The classical economists distinguished three types of economies: free-market economies, interventionist economies, and centrally planned economies. They also believed that human beings and their actions have an important role to play in the development of the economy. In interventionist economies, the government plays the dominant role in deciding how the economy should be conducted and controls all the main economic forces. On the other hand, market economies incorporate elements of both interventions and free-market processes.
Market economies are characterized by flexible prices and elastic production and demand. Prices can be flexible in the sense that they can rise or fall depending on changes in the conditions of supply and demand, which take place at the input and final stages of production. Elasticity refers to the tendency of prices to increase or decrease. In market economies, the ability of consumers and businesses to obtain goods and services on the market determines the degree of competition, which reduces the costs and increases the quality of available goods and services. A highly productive economy enables its residents to obtain the goods and services they need at low cost, competitive prices and in quantities that meet their needs.
However, even in market economies, some constraints may still prevent the efficient allocation of resources and encourage over accumulation of wealth at the top of the scale. In a centrally planned economy, the allocation of resources, capital goods, fixed land and other variables of a great degree affect the operation of overall economic activity. Centralized planning also limited the scope of competition, leading to monopoly, concentration of industrial wealth and other distortions.
The level of government regulation of markets determines the range of complexity of market transactions and the extent of distortions and unfair advantages. In highly regulated markets, individuals and organizations have stronger control over their decisions and can take actions to change inefficient market structures. Market economies with less regulation are characterized by less flexible prices, a lack of restrictions on the exercise of monopoly powers and the failure to provide the mechanisms for the determination of quality and quantity of goods. With respect to the level of government regulation, regulated economies promote protection of private rights and impede economic developments that may displace existing powers. In highly market-oriented economies, the state plays a key role in determining the distribution of income and in providing social services.
Economists divided the economy into several different categories, including personal economy, public economy and political economy. The term ‘personal economy’ refers to the actions that economy’s actors make on their own. Public economy, on the other hand, refers to the action of governments. Political economy is a special field that studies how politics affects the economy.
An economy is the large set of inter-related production processes that facilitate the exchange of goods and services. A market economy, by contrast, is a set of market-based economies where goods and services are traded according to their ability to supply within a market structure, without regard to individual needs. A market economy allows for the efficient allocation of resources, with prices set accordingly. Large-scale, centralized production processes are replaced by smaller scale, local production processes for basic necessities.
In contrast, a capitalist economy is characterized by small business ownership and participation. Small business ownership refers to either a sole proprietor or a partnership. Partnerships are formed for the purpose of pooling resources for the benefit of all the members. These enterprises do not exist solely as enterprises designed for the benefit of owners; rather, they are designed for the benefit of customers. A businessman in a capitalist economy buys raw materials from other businesses and then uses these materials to produce goods and deliver services to other customers. A home maker in a capitalist economy uses her home to produce the things she needs for a profit, while a home maker in a communist economy makes use of her home’s resources to make things to sell to others.