What is an Economy?

Economy is a place where different individuals make economic(monetary) decisions relating to allocation and utilization of limited resources towards production of goods and services such that leads to optimum satisfaction and supply-demand synchronization.

Let us understand this in a simple manner.

A society is made up of different people or individuals. Every individual has his or her needs that they try to fulfill through consumption of goods and services. Now everyone has with themselves something to offer which may be in the form of either a good or service. Suppose a farmer owns a land and produces wheat. Now wheat can be classified as a good. A teacher teaches the students in a school. The impart of teaching can be classified as provision of service. And an individual if has not got anything to produce or impart, he or she can also provide their labour. Now as we know every individual has several needs they try to fulfill but the question is how they can get those? As we discussed, every individual has got something to offer. So whatever it is, they will first consume up to fulfillment of their requirement and whatever excess they will have after their own consumption, they will trade the same to fulfill their needs of other goods and services. In our example, the farmer who produced wheat, will keep some quantity suffice for their own consumption and whatever excess is left, the farmer will trade the same that is sell and from the receipts of sale, will try to fulfill the need of other goods and services which he or she doesn’t have by themselves. In the same manner, by imparting the knowledge the teacher earns some money and can then buy the wheat to fulfill his or her need of hunger.

Now at the same time, the resources with the individuals is also limited. A farmer has limited amount of land and hence will be able to produce limited amount of wheat and hence even after selling the same, the farmer will have limited amount of money at his or her disposal. From this limited amount of money at disposal, he or she will be able to buy again limited amount of goods or services. So often they will need to prioritize while deciding as to what goods or services to buy or consume. If they want to have more of something, they will need to forgo something else. So everyone has limited amount of resources in the society and hence they will need to use those resources in a manner in which their utilization level is maximum.

This is all happening at individual level, but it is again needs to be in synchronization at the society level. Meaning the total wheat produced by all the farmers should match the total wheat demanded by the people living in the society. Suppose the demand of wheat is lower than the total production of wheat done collectively by all the farmers, then the farmers will need to shift some resources from production of wheat towards production of other commodity which is in demand. And vice versa, if the demand of wheat is more than the total production of the wheat in the society, then other resources which are currently utilized in other produce in lower demand, will need to be shifted in the production of wheat. Like wheat, same goes for every other goods or services produced in a society. Because as individual have limited amount of resources and they need to make choices, the same goes for the society. The resources with the society is also limited (because on an aggregate level, the society itself is built up of all individuals collectively) and hence the scared resources need to be allocated between different goods and services such that the demand and supply for each of them remains in synchronization.

Now as per how the resources are allocated and utilized, unique combination of different quantum of different goods and services will be produced in an economy. As soon as, a change in allocation of resources towards utilization is made, the mix of goods and services produced would also change. Again those goods and services produced would then need to be distributed in the society among the individuals.

So to say, this explanation finally brings us to two major aspects which we consider as the economic decisions or economic problems a society makes and faces respectively, that is how the allocation of limited resources is to be made and then how to distribute the final mix of goods and services produced from the allocation made?

So if we summarize the main economic decisions that are made within an economy are as under:

What goods and services are produced and in what quantity?

As we discussed, the need and wants of goods and services are unlimited and the individuals as well as society at large always needs to decide which goods and services are needed to be produced and in what quantity they are to be produced?

How are these goods and services produced?

As we know to produce any good or service we need resources. Now what amount of resources to be used for production of a particular good or service and at the same time which resources to be used from several choices to make those goods and services.

Who will consume these goods and services?

This decision pertains to how the produced goods and services will be distributed among all the individuals that is to say who will get what amount of the produced good or service. And if it is to be assured that everyone should get few basic good or service irrespective of whether they have the economic capacity to get the same. For example, if in a society, everyone should get minimum food required, basic education as well as basic health facilities and shelter to live, which can assure a minimum living of standard for those people.

So to say, any economy is concerned with two main problems to solve in the best possible manner that is allocation of limited or scarce resources to produce goods and services and then distribution of those goods and services among the individuals.