Economics is the study of how individuals and businesses make decisions to best satisfy wants, needs, and desires with limited resources and how efficiently and equitably resources are allocated.

There are different types of economic systems.

A planned economic system is a type of economy in which the government has more control over what is produced, the resources to produce the goods and services, and the distribution of the goods and services. Communism and socialism are planned economic systems.

In market economies which are characterized by capitalism, individuals and private firms make the decisions about what to produce and how goods and services are distributed.

Most modern economies in the Western world are mixed economies, which are a blend of market and planned economies.

Supply refers to how much of a good or service is available. The amount of it supplied will increase as its price increases. Supply is affected by five factors:

Technology changes

Changes in resource prices

Price expectations

The price of substitute goods

The number of suppliers

Demand refers to how much people want to buy of a product at any given time. The amount demanded increases as a product’s price declines. Demand is affected by five factors:

Changes in income levels

Consumer preferences

Changes in population

Changes in the prices of substitute or complementary goods

Changes in expectations

There are several degrees of competition, including monopoly, oligopoly, duopoly, monopolistic competition, and perfect competition.

In a monopoly, where only one seller supplies a good or service, supply may be limited. The supplies may increase with a duopoly, or an oligopoly, in which two or a few sellers exist, respectively. Monopolistic competition is characterized by many sellers that sell slightly different products at slightly different prices. This increases the supply of the products and choices for consumers. Similarly, there are many sellers in perfect competition, which also increases the supply of a good or service. In a perfectly competitive market, the product being sold is virtually identical across suppliers and sells for the same price. No single producer is able to affect the price at which the product is sold.

The gross domestic product (GDP) measures the overall market value of final goods and services produced in a country in a year. GDP is an important economic indicator of an economy’s productivity and health. When a nation’s GDP goes up, the country’s economy is moving in a positive direction.

The consumer price index (CPI) and producer price index (PPI) are indicators of inflation or deflation.

The CPI tracks changes in prices over time by measuring changes in the prices of goods and services that represent the average buying pattern of urban households.

The PPI tracks the average change in prices of those goods sellers use to create products, such as raw materials and product components that require further processing, and finished goods sold to retailers.

The unemployment rate is watched as an indicator of how well the economy is performing. If unemployment is high, the economy is not using all of its resources and is probably experiencing a downturn. An increasing unemployment rate generally has a corresponding increase in government spending on social policies (such as welfare and unemployment payments).

Increasing productivity means that a firm’s existing resources are producing more, which generates more income and more profitability.

The four stages of the business cycle are the peak, recession, trough, and expansion or recovery.

The government’s fiscal policy determines the appropriate level of taxes and government spending. An increase in taxes translates into lower consumer ­spending and helps contain an economy that is growing too quickly. Lowering taxes will stimulate spending and help boost a sluggish economy.

Monetary policy is the means by which the Federal Reserve manages to control inflation by changing interest rates, buying and selling government securities, or trading in foreign exchange markets.

The Federal Reserve System is responsible for the monetary policy of the United States. The Fed keeps the economy from experiencing severe negative or positive swings by controlling the money supply through open market operations and by making changes in banks’ reserve requirements and changes in the discount rate.