Economy

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What is 'Economy'

An economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated. This is also known as an economic system.

BREAKING DOWN 'Economy'

An economy encompasses all activity related to production, consumption and trade of goods and services in an area. An economy applies to everyone from individuals to entities such as corporations and governments. The economy of a particular region or country is governed by its culture, laws, history, and geography, among other factors, and it evolves due to necessity. For this reason, no two economies are the same.

Types of Economies

Market-based economies allow goods to flow freely through the market, according to supply and demand. This type of economy has a tendency to naturally balance itself. As the prices in one sector for an industry rise due to demand, the money and labor necessary to fill that demand filter to the places where they are needed.

Command-based economies are dependent on a central political agent, which controls the price and distribution of goods. Supply and demand cannot play out naturally in this system because it is centrally planned, so imbalances are common.

Green economies depend on renewable, sustainable forms of energy. These systems operate with the end goal of cutting carbon emissions, restoring biodiversity, relying on alternative energy sources and generally preserving the environment. This report from the United Nations Environment Program, "Examples of the Green Economy in Practice," gives a few examples of societies that are embracing this system.

The study of economies and the factors affecting economies is called economics. The discipline of economics can be broken into two major areas of focus, microeconomics and macroeconomics. Microeconomics studies the behavior of individuals and firms in order to understand why they make the economic decisions they do and how these decisions affect the larger economic system. It focuses on specific industries and markets, rather than on the market as a whole. Macroeconomics, on the other hand, studies the entire economy, focusing on large-scale decisions and issues, including unemployment and gross domestic product (GDP). Macroeconomics can be used on a national scale to a global scale.

History of the Concept of Economy

The word economy is Greek and means "household management." Economics as an area of study was touched on by philosophers in ancient Greece, notably Aristotle, but the modern study of economics began in 18th century Europe, particularly in Scotland and France.

Originally, the study of how people worked together to use resources for the production of good was called political economy, and the men (almost exclusively) who theorized the economy were called "political philosophers."

The Scottish philosopher Adam Smith, who in 1776 wrote the famous economic treatist The Wealth of Nations, was thought of in his own time as a moral philosopher. He and his contemporaries, believed that economies evolved from pre-historic bartering systems to money and eventually credit-based economies. 

During the 19th century, technology and the growth of international trade created stronger ties among countries, a process that accelerated into the Great Depression and World War II. After 50 years of the Cold War and the end of the Bretton Woods agreement, the late 20th and early 21st centuries saw renewed globalization of economies.

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