Macroeconomics
B. The Economy The economy refers to the system through which goods and services are produced, distributed, exchanged,andconsumedwithinasociety.Itencompassesalleconomicactivitiesandinteractionsthat occur, involving individuals, frms, markets, and governments.
An economy can be a representation of various scopes, ranging from a nation or region to a singular industry or even a household unit.
An economic system or structure refers to the way in which production is organized andchoicesare made in an economy. It identifes the means by which households, frms, and governments make decisionsrelatingtothethreeresourceallocationquestionsofwhattoproduce,howtoproduce,andfor whom to produce.
There are 3 main economic systems:
● Market Economy (also known as Laissez-Faire orFreeMarketEconomyandCapitalism): In thiseconomicsystem,resourcesareallocatedthroughthe pricemechanism whichisbasedon the forcesofdemandandsupply .Thismeansthathouseholdsandfrmsinteractasbuyersand sellers and make decisionsonhowtoallocateresourcestosatisfytheirwantsandneeds.The government has little to no control over the process of resource allocation. In addition, productive resources and assets are owned by individualsand private frms . For example, when excess supply exists because too much is being produced compared to demand,goodsstockpileinshopsandwarehouses.Inanattempttoencouragepeopletobuyand clearthestock,frmsreduceprices.Thismaycleartheexcesssupply;however,somefrmsmight choose to stop producing at lower prices. With less suppliers in the market, the price rises. Assumingnochangeindemandoccurs,frmsmaydecidetore-enterthemarketleadingtoafall in price and the whole process will continue. This shows that prices and the self-interest of individuals and frmsguidethedecisionsinamarketeconomywithouttheneedforgovernment intervention.
The United States is one of the closest examples of a market economy globally.
● CommandEconomy(alsoknownasaPlannedorCentrallyPlannedeconomy): Contrarytoa market economy, in a planned economy the government has a signifcant role in making decisions related to resource allocation. In principle, all choices made in terms of what to
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