An economy is a place of the exchange, production and distribution of goods and services, by various agents, for the benefit of society. By “different agents” we imply those people who actually perform the relevant functions concerned. In simple terms, an economy is a social community where all the economic activities are directed towards the accomplishment of common purposes, pursued by the individuals in their capacity. The scope of economic activity is vast and varies across the board. In a basic sense, economics refers to the study of how people, individually and collectively, affect the world around them and interact to affect the economy.

An economy can be broadly classified into three basic categories: productive, unproductive, and capital-goods economies. A productive economy is one in which the effort and resources expended on production are productive in the final sense. For example, the value of the output of plant and machinery, the value of labor and other human resources invested in training and education, the value of various types of land and other resources used in the operation of industries, and so on, are all considered to be productive. Likewise, an economy that is unproductive is one in which the output obtained from the activity of economic agents is not beneficial to the society.

Capital-goods economies depend on the ability of fiscal agents to make the kinds of purchases needed for the accomplishment of economic activity. The ability to buy means to produce necessitates the existence of monetary units, which are the money power underlying the operation of the economy. Money, being a powerful form of authority, is capable of influencing both supply and demand in the market. The demand function, being determined by the real productive potential of the economy, determines the price level of goods and services. On the other hand, production of scarce goods, including certain forms of energy and other essentials, such as food and water, requires the employment of physical resources that form the inventory of capital goods. These assets, through their exchange value, determine the level of income and wealth available from the operation of economy.