Economy is the system of goods and services in a nation. It consists of various activities that are designed to deal with the challenges of scarcity and distribute resources efficiently. It addresses these needs by creating institutions that manage the production of goods and services and their distribution. Economies can be classified into three types: traditional, command, and market economies. They differ in their ideals and systems of controls.
A typical economy is made up of households (buyers), businesses (sellers), and the government (controller). The government’s role in an economy is to regulate, provide public services and redistribute wealth and income. It is also responsible for securing foreign investments and collecting taxes.
Households and businesses interact to create an economy by buying and selling goods and services voluntarily. As a result of this interaction, the economy becomes larger and more complex. People are financially rewarded for the value they produce, and they trade this portable representation of their productive output (money) for other goods and services. Over time, the economy will evolve to improve its efficiency and the standard of living it provides to its citizens.
A market economy works in harmony with basic human nature as the pursuit of self-interest becomes a natural incentive to work and create. The law of demand and supply combines to naturally allocate resources: scarcer goods cost more, while abundant ones cost less. Efficient logistics is a key component of a successful economy, as it allows for easier movement of labor and goods from one household to another, and from business to business.