Economics: Economy: Meaning, Definition and Types of Economies (For CBSE, ICSE, IAS, NET, NRA 2022)

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Meaning

An economy is a man-made organization for the satisfaction of human wants.

Definition

  • According to A. J. Brown “Economy is a system by which people get living” .
  • In short, economy is a framework where all economic activities are carried out.

Salient Features

  • Economic institutions are manmade. Thus, an economy is what we make it.
  • Economic institutions can be created, destroyed, replaced or changed.
  • It keeps on changing.
  • Producers and consumers are the same person.
  • Production, consumption and investment are the vital process of an economy.
  • Money acts as a medium of exchange.
  • Free functions of prices and market forces is increasing.

Types of Economies

There are various types of economic systems on the basis of following criteria:

Types of Economies

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

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

Capitalist or Free Enterprise Economy

Capitalist economy means where there is minimum intervention of government in the economic activities of a nation. They are supported by the policy of “laissez free” means leaving free. Example of capitalist economy is USA, UK.

Features

  • Private property: All the individuals have the right to own, acquire and use the property for benefit of his family.
  • Freedom of enterprise: It 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.
  • Consumer՚s sovereignty: Consumers have the full freedom to spend their income on goods and services that give them maximum satisfaction. They are treated like a king.
  • Profit Motive: Self-interest is the guiding principle in capitalism. Entrepreneurs are always motivated to maximize their residual profit by minimizing cost and maximizing revenue
  • Competition: As there are no restrictions on the entry and exit of firms in a capitalism system, the competition in the economy increased and it is essential to safeguard consumer՚s against exploitation.
  • Importance of markets and prices: Capitalism is essentially a market economy where every commodity has a price. The forces of demand and supply in an industry determine this price.
  • Absence of government interference: Government intervention and support is not required. The role of government is to help in free and efficient functioning of the markets.

Socialist or Centrally Planned Economy

  • In the socialist or centrally planned economies all the productive resources are owned and controlled by the government in the overall interest of the society.
  • Example of socialist economy is Russia, China.

Features

  • Collective Ownership of means of Production: All means of production are owned by the government on behalf of the people. No individual is allowed to own or acquire the property for personal use.
  • Social Welfare objectives: The decisions are taken by the government at macro level with the objective of maximization of social welfare in mind rather than maximization of individual profit.
  • Central Planning: The Central Planning Authority keeping the national priorities and availability of resources in mind allocates resources. All the decisions are taken by the government.
  • Reduction in inequalities: By abolishing the institutions of private property and inheritance which are the root cause of inequalities, socialist economic system is able to reduce the inequalities of incomes.
  • No class conflict: In socialism there is no competition among classes. Every person is a worker so there is no class conflict.

Mixed Economy

A mixed economy is an economy which has some elements of both free enterprise and capitalist economy as well as a government controlled socialist economy. The public and private sectors co-exist in mixed economies. Example of mixed economy is India.

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