Economy Definition – What is Economy? Free Market Economy vs Command Based Economy

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Economy-definition
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Here you will understand the definition of the economy- what does economy means? What are the different types of economies? And much more.

What is an Economy?

Any economy has two things –

  1. Set of rules
  2. Established institutions to implement those rules

The aim of any economy is the efficient use of resources.

A nation can have an economy, or a state can have an economy. Even a family can have an economy.

What is Economic Activity?

All activities which utilize resources and create value are Economic Activities. Production, consumption, exchange, or distribution are forms of Economic Activity.

economic-activity

All economic activities have an opportunity cost.

What is Opportunity Cost?

Cost of sacrificing next best alternative. You are preparing for UPSC but you are sacrificing an opportunity to have a successful career as a software engineer or data scientist. So the cost of sacrificing that is an opportunity cost.

Depending on the control of resources economy can be a free market economy or a command-based economy.

Free Market Economy

  • A free market economy is self-regulated.
  • Minimum government intervention
  • Private ownership of resources
  • Profit is the ultimate motive

Command Based Economy

  • The government regulates the production
  • Determines prices
  • Public ownership of resources
  • The motive is to reduce inequalities

In the modern world hardly any economy is purely market-based or purely command based.

The Indian Economy is a mixed economy. It has features of both a free market economy and a command-based economy. In some places, the government does not intervene but in most of the cases it does.

Singapore is example of free market economy. Here businesses are encouraged to fix prices and government intervention is very little.

To learn more read Economy concepts

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