Economy

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An economy is the collection of all activity related to the production, consumption, and trade of goods and services in an area. When Sony manufactures a PS5, and when you spend $500 to buy it, both of you are contributing to the economy. Because an economy is based on the decisions of those in the economy, no two economies are identical.

There are two types of economies, market-based economies (capitalism) and command-based economies (socialism). The United States is primarily a market economy where consumers and producers (supply and demand) determine what's sold and produced. Producers control what they make and set their own prices, while consumers own what they buy and choose how much they're willing to pay. For example, since the demand for PS5s is high, prices are high. When prices rise, production tends to increase to satisfy the demand. To increase production, producers will have to hire workers, also driving wages up. As you may see, a market economy tends to balance itself naturally. 

Command-based economies are economies in which a central government controls the price and distribution of goods. Supply and demand cannot play out naturally in this system because it is centrally planned, so imbalances occur. Public education, infrastructure spending, public transportation, and social security benefits are examples of central planning in America. Pure market economies or command-based economies rarely exist since there's usually some government intervention and some free exchange; therefore, most economies are known as mixed economies. 

The study of economies and the factors affecting them is called economics. Economics has two main branches: microeconomics and macroeconomics. Macroeconomics studies the entire economy, including large-scale decisions and issues, whereas microeconomics studies individuals and firms. 

The study of microeconomics examines why different goods have different prices and how individuals interact with each other. It does this by researching individual choices and issues that impact decisions. For example, researchers in microeconomics might wonder why you would spend $500 on a PS5 instead of something else or why Sony sets the price at $500 instead of higher or lower.

The study of macroeconomics involves the analysis of factors that affect the entire economy, such as price increases and inflation. One major focus in macroeconomics is the economic growth rate or gross domestic product (GDP), which represents the total amount of goods and services produced in an economy. Changes in unemployment, national income, and foreign trade are also studied. For example, macroeconomic research might explore global supply-chain issues, which explains why Sony can't satisfy the demand for PS5s.  

Now that you have a basic idea of what an economy is, we can dive deeper into one of the most important concepts in economics, supply and demand.

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Alpaca does not make recommendations with regard to fractional share trading, whether to use fractional shares at all, or whether to invest in any specific security. A security’s eligibility on the list of fractional shares available for trading is not an endorsement of any of the securities, nor is it intended to convey that such stocks have low risk. Fractional share transactions are executed either on a principal or riskless principal basis, and can only be bought or sold with market orders during normal market hours.

The content on this website is for illustrative and informational purposes only and any historical returns, expected returns or projections are hypothetical in nature. Investing involves risk & investments may lose value, including the loss of principal. Past performance does not guarantee future returns or results. Before investing, carefully consider your investment objectives, time horizon, and overall risk tolerance as well as the information stated in the product offering prospectuses.