Economy : An economy is a system which provides the people the mean to earn and work . 

Important process of economy :- 

  1. Production : It includes tangible and intangible goods which results in the final goods and services. 
  2. Consumption: Use of goods and services by households 
  3. Investment : An asset or item acquired with the goal of generating income
  4. Exchange : Transfer of ownership 
Types of economic systems 

1. Centrally Planned Economy 

  • Production activities are undertaken by the government . 
  • The factors of production are owned by the government
  • Factors of production : There are four factors of production . Land (Natural resources) , Labor ( Anyone doing physical or mental work ) , Capital ( Machinery ,tools) and Entrepreneur( Person who manages land , labour and capital ) . 
  • The role of private entrepreneurs is minimal . 
  • The state controls the distribution of goods among the segments of the society . 
2. Market Economy 

  • Production activities are undertaken by the private owners. 
  • The factors of production are owned by the private firms. 
  • Role of government is minimal . 
  • Competition among the business. 
  • Also known as Capitalist or Free Economy . 
3. Mixed Economy 
  • It is the mixed variety of capitalism and socialism . India is under mixed economy . 
  • Co-existence of private and public sector 
  • Profit motive and social welfare 
  • Government provides the essential goods under supportive rates and private sector firms produce goods that are not much essential but of luxury of daily needs. 
Economic Problems : 

  1. Limited Resources : In an economy we have limited resources and from them we have to create other things. Resources such as land , water , air etc., are not going to increase in future but they are of limited quantity. Hence Judicious use of natural resource is mandatory . 
  2. Unlimited Wants : In an economy , one the one hand we have limited resources which are on decline due to uses and no generation , on the other hand we have unlimited wants from the limited resources. Different strata of society needs different goods and services and it is really a very big challenge to decide to what to produce and what to sacrifice. 
  3. Their ultimate use : Since we have studied that resources are limited and wants are unlimited hence we should be aware of the fact that there will be a trade off between many goods and services. We cannot fulfill all the wants with the limited resources. 

Central Problems of an economy : 

1. What to produce 
2. How to produce
3. For whom to produce