Planned, market and mixed economies

Societies solve the central problems in different ways.

Centrally planned economy: the government (a central authority) plans all important activities: production, exchange and consumption. It may produce goods like education and health itself, or ensure that output is shared fairly among all.

Market economy: economic activity is organised through markets. In economics, a market is not just a place: it is any arrangement in which people can freely buy and sell, by phone or online as much as face to face.

In a market economy, prices coordinate everything. A price is a signal of how much society values a good. If buyers want more mangoes, the price of mangoes rises; producers see the signal and produce more. No one needs to plan it.

In practice, all real economies are mixed: some decisions are left to markets, others are made or guided by the government. In India, the government's role was very large after independence and has been reduced since. The book gives the USA as an example of a country where the government's role is relatively small.