How Is Economy Determined?

Are you a newbie in the economy? You probably have a good idea what an economy is. So, do not waste time before starting your own economy based on your own techniques, and tips. The main things that you should learn are how to develop the economy of your own and how to manage it. It is a matter of creativity in this case.

There are many people who are in the economy. Economy is a term which refers to the processes, procedures, models, structures, etc., involved in all economic activity. An economy is a place of association, exchange, production and consumption, not only of human products and services, by other agents. In simple terms, it can be defined as the practices, discourses, material manifestations and the relationships of the creation, distribution, and utilization of productive resources. The concept of economy has both economic and political significance, since it affects the direction and functioning of society, state, and family relationships.

Unlike the traditional economic systems, economy considers production in the market instead of creating value in value form from raw materials or by means of labor. Instead, the economy tries to create surplus value through the employment of capital goods, the expansion of market, international trade, technology transfer, innovations, consumer protection and other such processes. This system of production and employment is different from the classical or socialist economy where there is no scope for the employment of capital goods. Economic power is distributed between the producers and consumers as wages and profits.

In pure market economies, prices set for specific goods and services are allowed to vary. In a pure market economy, prices are set depending on demand and supply. The most famous example of a pure market economy is the free market or competitive market. There are no barriers to entry or dumping which means that prices can fluctuate freely. Entrepreneurs and investors have the freedom to set their own prices. In this system, the consumers benefit through lower prices and the businesses benefit through increased sales and market share.

Pure market economies have no restrictions or limitations on the amount of investment that can be made. Entrepreneurs and investors can divert their funds to other projects and can even let them sit idle for a while. There is no control on the quality of the goods produced or the quantity of the goods supplied. In pure market economies, the consumers have complete freedom of choice as regards the kind of goods they want to buy.

In market-based economies, the process of pricing of goods and services follows a fixed process. The prices are established based on the demand and the supply of the good. The factors that determine prices include supply and demand theory, level of competition, level of investment, etc. In market economy consumers have the power to decide what they want to buy and sellers have the power to decide what they want to sell. Therefore, in this type of economy, prices are flexible and can change at anytime based on external factors.

One of the disadvantages of the market economy is that the entrepreneurs and the investors usually control too much wealth and the economy becomes inefficient because of excessive wealth concentration. This happens when there is an excessive accumulation of wealth by a few individuals. In inefficient market economies, there are shortages of some basic needs such as food, water, fuel, etc. These situations can bring about a catastrophic decline in living standards.

In a pure market-based economy, the process of pricing of goods and services follows a set process. For instance, goods are priced according to their production costs, taking into account the advances in technology that reduce costs for manufacturing goods. This pricing is called cost-push inflation. This process of pricing of goods is called cost-push inflation, which is why most countries with market economy experience rapid inflation during periods of economic boom (i.e. periods of high investment, high employment, high consumer spending power, etc.)

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