What is the Economy? – Definition and Significant Segments
The economy is a social science that studies how to manage the available resources to satisfy human needs. It analyzes the behavior, decisions and actions of humans. It explores how people, companies, and governments decide production, distribution, and consumption.
Given that the planet’s resources are scarce, and unfortunately, not all of us can have everything, we must manage these goods to get what we lack. Therefore, economic science involves individuals, organizations, and states’ decision-making to allocate those scarce resources.
The economy also focuses on the behavior of individuals, their interaction in the face of certain events and the effect they produce on their environment. For example, their impact on prices, production, wealth or consumption, between others. It is a social science since it studies human activity and behavior, a highly dynamic object of study. Humans are unpredictable.
It is also known as economy, the set of decisions of individuals, companies, and governments, resulting in a large group of interrelated production, distribution, and consumption activities, which define how resources distribute. For example, a country’s economy is the set of all complementary activities within the country.
The word economy comes from two Greek words—Oikos and Niemen, which form Oikonomia and mean the home administration.
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Significant Segments of the Economy
There are some ways to segment the economy. Let’s differentiate each segmentation:
Economics can divide into two major areas of study:
- Macroeconomics: Study the global functioning of the economy as an integrated whole.
- Microeconomics: Study the economic behavior of companies, households and individuals.
Economic thought has derived from many economic theories and schools. However, we can separate them into two major economic approaches:
- Interventionists: They defend the need for the active intervention of the state to solve economic problems.
- Classical economists or economic liberalists: They defend private property and voluntary contracts. They do not consider the state’s intervention necessary to solve financial problems.
In addition, we can separate the economy into two types of philosophical currents:
- Positive economics: which refers to postulates that can verify.
- Normative economics is based on value judgments that cannot be proven.
In addition, there are various ways of organizing a society that can include, to a greater or lesser extent in one system or another. The necessary arrangements of economic systems are:
Economic systems depending on whether or not there is private property:
- Capitalist economies: Also called free or market economies. They are economies wherein individuals and companies transfer out the production and exchange of goods and services through prices and markets transactions.
- Socialist economies: It is known as a centrally planned economy. In its purest state, they demand the substitution of private property for collective property in the means of production, exchange and distribution; in the same way, it calls for the equal distribution of wealth and the elimination of social classes.
- Mixed economies: Currently, economies are usually integrated, in which citizens and others by the Government make part of the decisions. It allows for correcting existing market failures.
Economic systems conferring to the coordination or decision-making mechanism:
- Traditional economy: Humble economies whose decisions built on tradition. These are rural and mainly agricultural countries.
- Authoritarian economy: Economic decisions are finish by a central authority, such as a dictatorship.
- Market economy: Best economic decisions are made by citizens. It occurs in mixed or capitalist economies.
Moreover, Political economy is a division of economic science that studies how the production, distribution, exchange, and consumption of goods and services organizes in different societies.
Characteristics of Political Economy
- It is an interdisciplinary science. That is, the analysis must include economic variables and sociology and politics.
- It helps us understand how governments create their fiscal and monetary policy decisions.
- It provides a broader view of the economic management of a country. Thus, it allows us to understand why the state takes specific measures, even if they are inefficient or profitable.
- It has a historical approach, taking the preceding currents of thought to determine what they have been able to fail and succeed.
History of Political Economy
However, Political economy can remain said to have emerged with mercantilism in the 16th century. This doctrine postulated that the countries were richer as they accumulated the greatest amount of precious stones. For that reason, it proposes that nations should achieve a positive trade balance.
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