What Is an Economy? | Cash Course | PragerU Kids

Lemonade, sir! Lemonade, ice cold, only a dollar! Hey, nice stand you have there. If you grow your business, you could really help out your local economy. Economy? But I'm just trying to sell lemonade. Well, when you produce and sell a product, you're participating in something called an economy, which is an interconnected web between producers, you, and consumers, your customers. An economy can be local, national, and even global. For example, the United States has had the largest economy in the world for at least the last 60 years. Its wealth and resources are used to create and accomplish things all around the world. So my stand isn't just about lemonade? Nope, it's much more than that. So how does an economy work? Well, an economy is the activity between consumers and producers. When you buy lemons, sugar, and ice for your lemonade, you are participating in the economy as a consumer. On the other hand, when you make and sell your lemonade, you're participating in the economy as a producer. And who do you sell it to? Consumers! This cycle of economic activity is happening everywhere around you, including at your favorite restaurant, at your local barbershop, and all over the internet. As buying and selling increases, economies grow and expand, creating financially good times. But sometimes, due to various reasons like political instability, extraordinary events, and inflation, activity will slow down and the economy will contract or get smaller. This typically leads to people losing their jobs and having less money to spend. This leads to less economic activity, where consumers spend less, and businesses cut how much they produce. This pattern of expansion and contraction of the economy is called the business cycle. So, what happens if the economy contracts too much? Well, when it contracts for at least six months straight, the economy is said to be in a recession. I know it may sound scary, but the U.S. has had 13 recessions since the end of World War II, with most of them lasting less than a year. You may have even lived through a couple of them! Economies can be as big as a nation or as small as a community. No two economies are alike, either, since they are shaped by a region's geography, resources, culture, laws, history, and the choices and actions of the people living within it. One type of economy is a market-based economy, or free market economy. In this type of economy, producers and consumers, not the government, decide what is sold and produced based on supply and demand. Producers sell what consumers want and set prices based on what consumers are willing to pay. Like my lemonade stand! Yes, let's say that your lemonade is so good and in such high demand, you can barely keep up. To meet the demand, you have to hire more employees, buy more materials, and increase the supply of lemonade. This is great for your local economy and for you! As drinks continue to fly off the stand, you start upping your prices. Eventually, you notice sales are slowing down and customers are drinking a cheaper alternative. So, in order to stay competitive, you drop your prices and try to bring back that demand. That sounds exciting! Another type of economy is called a command-based economy. In this kind of economy, the government owns and controls production, distribution, and prices. Here, private ownership and competition is controlled, or doesn't happen at all. In other words, in this type of economy, your lemonade empire would cease to exist. Less exciting. In reality, no economy is purely market-based or command-based. Today, the majority of the world's nations are mixed economies. They usually lean more towards market-based or command-based economies, but have sprinkles of other types mixed in. For example, the United States is mostly a market-based economy, but the government can have sizable influence on the economy by changing interest rates or with subsidies for various products, artificially creating demand that otherwise might not exist. Vietnam is another example of a mixed economy. Up until the late 1980s, Vietnam was a pure command-based economy, but then it began to encourage private enterprise. Now that you know more about an economy, let's take a look at how you can participate and help your community and country thrive. 1. Be productive Economies thrive when citizens are educated and working. The decisions and efforts of an economy's citizens are what makes it great or not. 2. Be an entrepreneur Business owners create jobs, which in turn creates growth, which in turn can help the local economy. There are opportunities all around you. 3. Observe When you're walking around, consider what kind of economic activity is happening. Consider the stores, the products, the workers, and the customers. This may influence both where you shop and where to set up shop someday. We're all entangled in the complex web of the economy. As producers and consumers, we depend on one another for goods and services. So be sure to do your part, contribute, and make your community a better place.