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Free-market economy refers to an economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets, private ownership of productive enterprises. Laissez-faire is a more extensive form of free-market economy where the role of the state is limited to protecting property rights.
In economics, a free market is a system in which the prices for goods and services are self-regulated by the open market and by consumers. In a free market, the laws and forces of supply and demand are free from any intervention by a government or other authority and from all forms of economic privilege, monopolies and artificial scarcities. Proponents of the concept of free market contrast it with a regulated market in which a government intervenes in supply and demand through various methods such as tariffs used to restrict trade and to protect the local economy. In an idealized free-market economy, prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy.
Scholars contrast the concept of a free market with the concept of a coordinated market in fields of study such as political economy, new institutional economics, economic sociology and political science. All of these fields emphasize the importance in currently existing market systems of rule-making institutions external to the simple forces of supply and demand which create space for those forces to operate to control productive output and distribution. Although free markets are commonly associated with capitalism within a market economy in contemporary usage and popular culture, free markets have also been advocated by anarchists, socialists and some proponents of cooperatives and advocates of profit sharing.
Criticism of the theoretical concept may regard systems with significant market power, inequality of bargaining power, or information asymmetry as less than free, with regulation being necessary to control those imbalances in order to allow markets to function more efficiently as well as produce more desirable social outcomes.
Microeconomics (from Greek prefix mikro- meaning "small" + economics) is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.
One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes market failure, where markets fail to produce efficient results.
While microeconomics focuses on firms and individuals, macroeconomics focuses on the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national policies relating to these issues. Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on microeconomic behaviour and thus on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theories has been built upon microfoundations—i.e. based upon basic assumptions about micro-level behaviour.
Macroeconomics (from the Greek prefix makro- meaning "large" + economics) is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole. This includes regional, national, and global economies.
While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income).
Macroeconomic models and their forecasts are used by governments to assist in the development and evaluation of economic policy.
Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions. They also develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, saving, investment, energy, international trade, and international finance.
Macroeconomics and microeconomics, a pair of terms coined by Ragnar Frisch, are the two most general fields in economics. In contrast to macroeconomics, microeconomics is the branch of economics that studies the behavior of individuals and firms in making decisions and the interactions among these individuals and firms in narrowly-defined markets. The central problems of an economy are 1. What to produce ? 2. How to produce ? 3. For whom to produce ?
Planned economies contrast with command economies. A planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc." whereas a command economy necessarily has substantial public ownership of industry while also having this type of regulation.
Most of a command economy is organized in a top-down administrative model by a central authority, where decisions regarding investment and production output requirements are decided upon at the top in the chain of command, with little input from lower levels. Advocates of economic planning have sometimes been staunch critics of these command economies. For example, Leon Trotsky believed that those at the top of the chain of command, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and who understand/respond to local conditions and changes in the economy, and therefore would be unable to effectively coordinate all economic activity.
Although historians have associated planned economies with Marxist–Leninist states and the Soviet economic model, some argue[weasel words] that the Soviet economic model did not actually constitute a planned economy in that a comprehensive and binding plan did not guide production and investment, therefore the further distinction of an administrative command economy emerged as a more accurate designation for the economic system that existed in the former Soviet Union and Eastern Bloc, highlighting the role of centralized hierarchical decision-making in the absence of popular control over the economy. The possibility of a digital planned economy was explored in Chile between 1971 and 1973 with the development of Project Cybersyn and by Alexander Kharkevich [ru], head of the Department of Technical Physics in Kiev in 1962.
Another key point is that command economies are inherently authoritarian[citation needed] whereas economic planning, in general, can be either participatory and democratic or authoritarian. Indicative planning is a form of planning in market economies that directs the economy through incentive-based methods. Economic planning can be practiced in a decentralized manner through different government authorities. For example, in some predominately market-oriented and mixed economies[which?] the state utilizes economic planning in strategic industries, such as the aerospace industry. Mixed economies usually employ macroeconomic planning while micro-economic affairs are left to the market and price system.
Note too the utilization of dirigisme, or government direction of the economy through non-coercive means, as practiced in France and in Great Britain after World War II. The Swedish government planned public-housing models in a similar fashion as urban planning in a project called Million Programme, implemented from 1965 to 1974.
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing living standards between nations, while nominal GDP is more useful comparing national economies on the international market.
The OECD defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services (plus any taxes, and minus any subsidies, on products not included in the value of their outputs)." An IMF publication states that, "GDP measures the monetary value of final goods and services—that are bought by the final user—produced in a country in a given period of time (say a quarter or a year)."
Total GDP can also be broken down into the contribution of each industry or sector of the economy. The ratio of GDP to the total population of the region is the per capita GDP and the same is called Mean Standard of Living. GDP is considered the "world's most powerful statistical indicator of national development and progress".
A traditional economic system is based of of customs, history and time on her beliefs Traditional economy is an economic system in which traditions, customs, and beliefs help shape the goods and services the economy produces, as well as the rules and manner of their distribution. Countries that use this type of economic system are often rural and farm-based. Also known as a subsistence economy, a traditional economy is defined by bartering[citation needed][dubious – discuss] and trading. A little surplus is produced[citation needed] and if any excess goods are made, they are typically given to a ruling authority or landowner.
A pure traditional economy has had no changes in how it operates (there are few of these today). Examples of these traditional economies include those of the Inuit or those of the tea plantations in South India. Traditional economies are popularly conceived of as "primitive" or "undeveloped" economic systems, having tools or techniques seen as outdated. As with the notion of contemporary primitiveness and with modernity itself, the view that traditional economies are backward is not shared by scholars in economics and anthropology.[citation needed]Two current examples of a traditional or custom based economy are Bhutan and Haiti.
Traditional economies may be based on custom and tradition, with economic decisions based on customs or beliefs of the community, family, clan, or tribe.
A mixed economy is variously defined as an economic system blending elements of market economies with elements of planned economies, free markets with state interventionism, or private enterprise with public enterprise. There is no single definition of a mixed economy. One definition is about a mixture of markets with state interventionism, referring specifically to capitalist market economies with strong regulatory oversight, interventionist policies and governmental provision of public services. The other definition is apolitical in nature, strictly referring to an economy containing a mixture of private enterprise with public enterprise.
In most cases, particularly with reference to Western economies, the term mixed economy refers to a capitalist economy characterized by the predominance of private ownership of the means of production with profit-seeking enterprise and the accumulation of capital as its fundamental driving force. In such a system, markets are subject to varying degrees of regulatory control and governments wield indirect macroeconomic influence through fiscal and monetary policies with a view to counteracting capitalism's history of boom/bust cycles, unemployment and income disparities. In this framework, varying degrees of public utilities and essential services are provided by government, with state activity often limited to providing public goods and universal civic requirements. This includes healthcare, physical infrastructure and management of public lands. This contrasts with laissez-faire capitalism, where state activity is limited to providing public goods and services as well as the infrastructure and legal framework to protect property rights and enforce contracts.
In reference to post-war Western European economic models as championed by Christian democrats and social democrats, the mixed economy is a form of capitalism where most industries are privately owned with only a small number of public utilities and essential services under public ownership. In the post-war era, European social democracy became associated with this economic model, as evidenced by the implementation of the welfare state. As an economic ideal, mixed economies are supported by people of various political persuasions, typically centre-left and centre-right such as Christian democrats or social democrats.
The business cycle, also known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product (GDP) around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions).
Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite the often-applied term cycles, these fluctuations in economic activity do not exhibit uniform or predictable periodicity. The common or popular usage boom-and-bust cycle refers to fluctuations in which the expansion is rapid and the contraction severe.