Economics is the study of how societies handle the distribution of money (wealth) and the production of goods and services. There are several different types of economic systems that historians and economists have identified throughout history, but the study of economics is usually centered around two main concepts, which include microeconomics and macroeconomics. Some key elements of any economic system which are important to understand are supply and demand, the boom and bust cycle, employment and government intervention.
WHAT IS ECONOMICS?
As explained previously, economics is the study of how societies handle the distribution of money (wealth) and the production of goods and services. As such, all economic systems deal with how best to achieve prosperity for citizens and how best to operate the services in a given country. To better understand this concept, economists have identified four basic questions that all economic systems must be able to answer.
- What will be produced?
- How will goods and services be produced?
- Who will get the goods and services that are produced?
- Who will make the decisions regarding what is produced and who gets it?
In other words, economics helps us understand how we decide what to produce, what to consume and how to exchange goods throughout society. In short, the concept of economics focuses on the problem of scarcity, which is the idea that resources such as time, money, and materials are limited. As such, different economic systems try to offer the best options for how to handle scarcity while also generating the most equal distribution of goods and services.
ECONOMICS – MICROECONOMICS AND MACROECONOMICS
The study of economics is usually broken into two basic concepts which are microeconomics and macroeconomics. Microeconomics is centered on parts of the economy that relates to individual people and businesses. It focuses on the decisions that individuals and businesses make in relation to the dynamic nature of the economy. For example, a business may decide to alter the price of a product or the wages of its workers based on the conditions in the economy. This is referred to as the idea of supply and demand, meaning that businesses change aspects of their operation to meet the levels of supply and demand for their product or service in the larger economy. The study of these individual and smaller decisions are called microeconomics by economists.
In contrast, macroeconomics focuses on the larger aspects of the economy that are usually carried out by governments. For example, macroeconomics usually centers on large issues that impact entire industries or economies and not just individual businesses. The boom and bust cycle and larger issues such as employment and taxation are considered to be areas of macroeconomics. Modern macroeconomic theory is considered to have emerged from the ideas of the famous economist John Maynard Keynes. Keynes’ ideas had a profound impact on the 20th century and specifically the Great Depression, when American President Franklin D. Roosevelt developed his New Deal based on the macroeconomic ideas of Keynes.
While microeconomics and macroeconomics have many differences it is important to understand that there are also several key ways in which the two are connected. More specifically, there is a great deal of overlap between the concepts of microeconomics and macroeconomics. For example, a business owner may decide the adjust the price of a product (which is a microeconomic decision) due to an increase in taxation brought about by the government (which is a macroeconomic decision). As well, the overall condition of an economy of a country or industry is based upon the many smaller decisions made by individuals and businesses within that economy. Therefore, microeconomics and macroeconomics are constantly impacting each other and causing changes in both.
ECONOMICS – ECONOMIC SYSTEMS
The main economic systems (traditional, command economy, free market economy and mixed economy) all answer the economic questions listed above differently. The answers for each economic system help us to better understand their underlying principles and where they fit on the economic spectrum.
TRADITIONAL ECONOMY
A traditional economy is the oldest type of economic system in history. In this system, people usually produce what they need for survival, relying on farming, hunting, and bartering (trading) rather than money that is produced by a central government. A traditional economy was common through the Middle Ages of Europe and throughout many different indigenous societies across the world. While it was common in early history and was a stable form of economic trade, it was limited by its lack of innovation and slow productivity. As such, as time passed, people sought new ways of organizing trade and economic activity.
COMMAND ECONOMY
A command economy is one of the main three types of economic systems that are still common today. In a command economy, the government (or central authority) makes most, if not all, economic decisions for the people. For instance, in a command economy the state owns all property, factories, and resources. Furthermore, leaders decide what will be produced, how much, and at what price. An example of this type of economy in history was seen during the time of the Soviet Union. Today, North Korea still practices elements of a command economy, wherein the central authority makes almost all of the economic decisions for the people of the country. This system is sometimes praised for the ability of a leader to make quick and decisive decisions to improve the economy of a country. With that said, command economies lack efficiency, economic freedom and often struggle with slow innovation.
FREE MARKET ECONOMY
A free market economy is based on individual choice and economic individualism. In general, it can be viewed as the opposite of a command economy, because the economic decisions are made through the interactions of people and companies, rather than through a central authority. For instance, businesses and consumers make the economic decisions through the forces of supply and demand. As such, prices are determined by competition between buyers and sellers, and not through central planning. An example of a free market economy today would be the United States. While it is not a pure free market economy, it is one of the most free market economies in the world today. Economists argued that a free market economy ecels at encouraging innovation, efficiency and improving consumer choice. Whereas, critics of a free market economy argue that it leads to inequality in the form of wealth gaps in society.
MIXED ECONOMY
A mixed economy is an economic system that contains both elements of a command economy and a free market economy. As such, economists refer to it as a mixed economy, since it has elements of both sides. In fact, ost countries today use a mixed economy. For instance, in a mixed economy the government regulates certain industries to protect consumers, workers, and the environment. At the same time, individuals and businesses are free to own property and operate in the free market. As stated above, most modern countries are considered to be mixed economies, including: Canada, Australia, Britain, Germany and the United States. Economists argue that a mixed economy is positive because it tries to balance efficiency of the market economy with the protections of a command economy. However, economists disagree on the level of government intervention. Some argue for more government inter
