An economy can be defined as a large set of inter-related consumption and production activities that help in comprehending how scarce are the allocated resources.
The production and consumption of products and services are used to quench the requirements of individuals residing and operating in the economy, which is generally known as the economic system.
‘Economy’ is a Greek word that means household management. In the form of a study area, Economics was touched by philosophers in ancient Greece, remarkably Aristotle. However, the modern study of this subject began in Europe in the 18th century, specifically in the regions of France and Scotland.
And then, in 1776, the Scottish Economist and philosopher – Adam Smith – wrote a famous economic book, known as The Wealth of Nations. He and his contemporaries believed that economies evolve from pre-historic bartering systems to money-driven and then the credit-based economies.
Thereafter, during the 19th century, the growth of international trade and technology established substantial ties among countries. This process accelerated World War II and the Great Depression.
Almost after 50 years of the Cold War, it was the early 21st century that saw a renewed globalization of the economies around the world.
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An economy comprises every activity that is related to manufacturing, consumption and trading of products and services within an area. The economy is applied to everyone, be it individuals, governments, corporations, and more.
Basically, the economy of a specific country is regulated by its geography, history, laws, culture, and other such factors. Since an economy evolves out of necessity; no two economies could be similar.
As per the supply and demand, the market-based economies enable products to flow freely throughout the market. In most of the market economies, consumers and producers get to determine what is produced and sold.
Herein, producers own what they manufacture and decide the price. Consumers, on the other hand, own what they purchase and decide how they would be paid. But, the Law of Supply and Demand can affect production as well as the prices.
If customer’s demands for a certain product increases, and there is a shortage of supply, prices tend to increase as consumers will be willing to pay more for that product. As a result, production tends to rise so as to satisfy the demand, considering that produces get driven by profit.
In turn, a market economy gets the tendency to naturally balance itself. With an increase in prices, because of the demand, in one sector of the industry, the labour and money required to fill up this demand shift to the places where they are needed the most.