Households and the Role of the Economy

An economy is a place of collective use, production and distribution of products and services, by various agents. In economic theory, it is defined ‘as a sphere of collective activity in which production occurs through interaction of persons.’ Economists divide the economy into several sectors, including monetary, credit and market processes. The theories of economy attempt to explain the causes of changes in the level of aggregate income of a society. The theories of economy attempt to explain how the distribution of income and wealth influences the political system and also the quality and quantity of living.

Mixed economies refer to some economic practices that include elements from both private and public economy. A mixed economy may be a blend of public and private sector where different institutions have their own important role in the economy. Some countries, like India, are a mixture of public and private economies. However, the United States is not a pure mixture of public and private economies; it is a mixed economy.

Macroeconomics is the study of national income and other financial data. It uses different economic indicators like personal income accounts, output, imports, exports, balance of payments, debt, fiscal policy, etc. to examine the relationship between the changes in variables. Changes in macroeconomics affect the overall performance of the economy. There are five fundamental components of macroeconomics: price, output, investment, savings and government spending.

Price changes are essential in determining the level of economic growth. Two types of changes are direct and indirect. Direct changes in prices occur when a firm decides to increase the price of a good. Indirect changes occur when the government or a sector decides to reduce the price of a good. An example of direct economic growth is the increase in retail sales. On the other hand, an indirect effect on the economy can be seen in the change in employment rates.

The concept of free-market capitalism is associated with laissez faire and minimal state involvement in the economy. It was founded by the classical economists of the 19th century – Say, Hayek and Rothbard. These economists argued that there is a natural order in which prices set by competition between businesses will prevail and the state has no role in the economy. This type of economic systems is characterized by minimal government intervention and low levels of taxation.

The concept of comprehensive economic planning is used to examine macroeconomics in a more comprehensive manner. It is also used to examine the relationships among economic policies. A comprehensive macroeconomic model is needed to calculate the effects of changes in domestic prices, GDP growth and employment rates on macroeconomic systems. A number of such comprehensive models have been developed.

There are many economic indicators used in studying the economic system. One of them is Gross Domestic Product (GDP). Growth of the economy is determined by how much total economic production is produced in a particular period of time. An economic model with many different variables affecting GDP growth can be constructed. Many economic textbooks contain many different types of economic indicators, each reflecting a particular subject of study.

Another economic concept that is crucial for understanding the workings of a typical economy is what is called “scarcity.” What is scarce is something that is very difficult to acquire or reproduce. This concept is closely connected to the issue of why certain goods or services are rare. An example of a scarce good is oil, rare raw materials, precious metals, such as gold, silver, copper and energy, such as coal.

The concept of scarcity is important for understanding the functioning of the economy. In the modern economy, many goods and services become rare as new technologies are developed. The process by which economies produce scarce resources leads to a “perfect competition” among various producers. This means that if two producers try to produce the same good, they will eventually have to fight over the scarce resources, leading to heavy price discounts for consumers. This results in economic contraction or even inflation in some cases. In such circumstances, consumers may be reluctant to buy goods and this leads to a recession.

Households also play an important role in a very simple economy. As noted above, economies are based on the principle of perfect competition. A producer may locate in an area where there is no demand for his products and he will be forced to move to another area, away from his competitors, in order to gain a market share. In such cases, consumers will opt to purchase goods only from sellers located near their homes. This type of trading makes it possible for households to maintain a standard of living despite shrinking incomes.

Households also play an important role in a market economy by using money to purchase goods and services. Money, unlike goods and services, is not produced or manufactured in economies; it is simply issued into the economy through a process of bank lending. Unlike goods and services, money is not produced or manufactured in economies; it is simply issued into the economy through a process of bank lending. Thus, when households save money, it leads to a rise in the value of the national currency. This rise in currency value is known as “fiscal stimulus” and is often used by central banks to intervene in the economy and pressurize the central bank to reduce interest rates in order to boost economic activity.