Economy – Its Meaning and Types: Meaning and Types of an Economy (For CBSE, ICSE, IAS, NET, NRA 2022)

Get top class preparation for CBSE/Class-10 right from your home: get questions, notes, tests, video lectures and more- for all subjects of CBSE/Class-10.

Meaning of an Economy

  • An economy is a man-made organization for the satisfaction of human wants. According to A. J. Brown, “An economy is a system by which people get living” . The way man attempts to get a living differs in major respects from time to time and from place to place.
  • Economy is a framework where all economic activities are carried out.

Some of the salient features of an economy are as follows:

  • Economic institutions are man-made. Thus, an economy is what we make it.
  • Economic institutions can be created, destroyed, replaced or changed.
  • For example, after independence in 1947 through economic and social reforms we abolished Zamindari system and introduced many land reform.
  • Levels of economic activities keep on changing.
  • Production, consumption and investment are the vital processes of an economy.
  • In modern complex economies we use money as a medium, of exchange.
  • Now-a-days the government intervention in the economy is considered undesirable and the preference for free functioning of prices and market forces is increasing in all types of economic system.

Types of Economies

economy is a man-made organization, which is created, destroyed or changed as per the requirement of the society. We can differentiate in various types of economic systems on the basis of following criteria.

On the Basis of Ownership and Control over Means of Production or Resources

Resources or means of production remain either in private ownership with full individual freedom to use them for the profit motive or they can be in collective ownership (government control) and can be used for the collective welfare of the society as a whole.

Based on the criterion of degree of individual freedom and profit motive, economies are labelled as:

Capitalist Economy

The capitalist or free enterprise economy is the oldest form of economy. Earlier economists supported the policy of ‘laissez fair’ meaning leave free. They advocated minimum government intervention in the economic activities.

Capitalist Economy

The following are the main features of a capitalist economy:

  • Private property - In a capitalism system all the individuals have the right to own property. An individual can acquire property and use it for the benefit of his own family. There is no restriction on the ownership of land, machines, mines, factories and to earn profit and accumulate wealth. After the death of a person the property or wealth is transferred to the legal heirs.
  • Freedom of enterprise - Freedom of enterprise implies that business firms are free to acquire resources and use them in the production of any good or service. The firms are also free to sell their product in the markets of their choice. A worker is free to choose his/her employer. In small business units owner himself takes the risk of production and earns profit or loss for himself.
  • Consumer՚s Sovereignty- In a capitalist economy consumers are like a king. They have the full freedom to spend their income on goods and services that give them maximum satisfaction. In capitalist system production is guided by consumer՚s choices. This freedom of consumers is called consumer՚s sovereignty.
  • Profit Motive - Self-interest is the guiding principle in capitalism. Entrepreneurs know that they will own the profit or loss after the payment to all other factors of production. Therefore, they are always motivated to maximize their residual profit by minimizing cost and maximizing revenue.
  • Competition - Competition is the fundamental feature of capitalist economy and essential to safeguard against consumer՚s exploitation. Although due to large-size and product distinction monopolistic tendencies have grown these days still the competition can be seen among a large number of firms.
  • Importance of markets and prices - The important features of capitalism like private property, freedom of choice, profit motive and competition make a room for free and efficient functioning of price mechanism. Capitalism is essentially a market economy where every commodity has a price. The forces of demand and supply in an industry determine this price. Firms which are able to adjust at a given price earn normal profit and those who fail to do so often quit the industry. A producer will produce those goods, which give him more profit.
  • Absence of government interference - In a free enterprise or capitalist economy the price system plays an important role of coordinating agent. Government intervention and support is not required. The role of government is to help in free and efficient functioning of the markets.

Developed by: