An economy is a system of organizations and institutions that either facilitate or play a role in

the production and distribution of goods and services in a society. Economies determine how
resources are distributed among members of a society; they determine the value of goods or
services; and they even determine what sorts of things can be traded or bartered for those
services and goods.
How a society structures its economic system is largely a political and social issue. The political
and legal structure of a society will govern how wealth can be accumulated, how wealth and
resources are distributed, and the manner of competition permitted between different participants
in the economy.
It deals with three key issues: what is produced how it is produced, and who gets what is
produced. There are three main types of economy: planned economy, market economy and
mixed economy. Planned (also known as command) types of economies were found in
previously communist countries, such as Romania, Bulgaria and Russia, and in North Korea
today. In a planned economy the government makes all decisions for society. Producers only
make what they are instructed to make. The main benefits are that most workers are employed
and most people enjoy a similar basic lifestyle. The problems, however, may be far-reaching: a
planned economy gives little capacity for development, so growth and investment is limited the
infrastructure is usually under-developed as government spends on other areas such as defence
wages are state-controlled, so people have less motivation to perform at higher levels prices are
fixed by government. Consumers often cannot afford luxury goods such as computers or mobile
phones, which are taken for granted in developed countries. In market economies (also known as
free enterprise) the government's role is limited to providing legislation to protect businesses and
consumers and making sure no single business or organisation restricts competition. It also
provides essential services (like police and defence) and ensures the country's money supply is
stable. The main features are: businesses are motivated by profits to make products that
customers will buy customers' demand for products and services affects the levels of supply and
the pricing if customers do not buy and demand falls, then a business must make less, be more
efficient or produce an alternative product. There are few, if any, examples today of countries
with a purely free market economy. A purely market economy could have several drawbacks. It
could lead to inequality in society. For example, those who can afford to pay for health care
receive it, those who cannot pay, do not. In times of economic crisis, without government
intervention, many businesses, such as major banks which have a fundamental role in the
nation's economy, would fail. The mixed economy is a combination of both planned and market
economies. Most countries demonstrate a mixed economy, including the most developed
countries like the UK and the USA. Even a communist country like China has an economy
which relies on a mixture of state and private enterprise: In a mixed economy, the government
contributes and controls some resources and the market controls the rest. The proportion of each
contribution may vary. For example, in some Scandinavian countries, the state provides a very
high level of social benefits but charges high taxes. In the USA, public benefits (such as free
national health care) are minimal. The UK position is somewhere in between.
Essential Processes of an
Economy: Production,
Consumption and Investment
Essential or Vital Processes of an economy mean those necessary economic activities
without which an economy cannot exist or work.

The primary function of the economy is to provide goods and services for satisfying
wants of the people.

The act of satisfying wants by the use of goods and services is called consumption.
Production and consumption are, therefore, essential economic activities which must go
on in an economy continually. But if the economy wants to maintain its existing
productivity or increase its future productive capacity, it must consume less than what it
currently produces. In other words, if the economy is to grow and expand, it must save
something from its current production and this saving must be invested. Hence there
are three essential processes of an economy,

(a) Production:
For an economy to exist, production of goods and services is very essential. The
standard of living or the consumption standard of the people depends, in the ultimate
analysis, on the volume and variety of production. In fact, performance of an economy is
judged by the level of its production. Richness or poverty of a country is dependent upon
the amount of goods and services it is able to produce.

The process of growth or development consists in increasing the level of production in

the economy. The United States of America is the richest country in the world and its
people enjoy the highest living standards because its level of production is the highest.
India is a poor country because its level of production is very low. In order to make India
rich, we shall have to step up the rate of production in the, economy.

In Economics, by production we mean any economic activity which is directed to the

satisfaction of the wants of the people. Whether it is the making of material goods or the
provision of any service, it is included in production, provided it satisfies the wants of
some people. Thus, in Economics, if making of cloth by industrial workers is production,
the service of the retailer, who delivers it to the consumer, is also production.

This is so because the service done by the retailer is a part of the process of satisfying
consumers’ wants just as much as the work done by the factory worker. Similarly, the
work of doctors, lawyers, teachers, actors, dancers, etc., is productive, since the services
provided by them satisfy the wants of those who pay for them.

Goods that are produced are of two types. One type of goods is called consumers’ goods.
Consumers’ goods are those goods which are used by the consumers for direct
satisfaction of their wants. Bread, clothes, shoes, tea, coca-cola, etc., are all examples of
consumers’ goods. The second type of goods is known as producers’ goods. Producers’
goods are those goods which help in producing further goods. The producers’ goods do
not satisfy the wants of the people directly but they satisfy their wants indirectly by
helping in producing consumer goods.

(b) Consumption:
The second essential economic activity is consumption. It is the quantity and quality of
consumption which constitutes the standard of living of the people. Consumption is the
act of satisfying one’s wants. That consumption is an essential process of an economy is
obvious. Producers make goods in order to satisfy the consumption wants of the people.
If no one consumes, no one will produce. Consumption is thus the end of all productive
activity. Moreover, consumption along with investment determines the level of income
and employment in the economy.

The late Lord Keynes, an eminent economist, showed that the level of national income
and employment depends upon the level of aggregate effective demand. Consumption is
one constituent of this aggregate demand. Changes in propensity to consume of the
people will bring about changes in income and employment in the country.

(c) Investment:
All that an economy produces may not be consumed. In fact, an economy must consume
less than what it produces if it wants to grow or develop. The excess of production over
consumption in a year is called saving and this saving is invested in further production.
Investment may be defined as “the addition made to the total stock of capital (including
inventories) in a year.”