What Is An Economy?

An economy is a large inter-connected system of production, consumption, and distribution activities that help to determine how valuable certain resources are allocated geographically. In an economy, goods and services are utilized to meet the personal needs and requirements of the people who live and work in it. Economists consider an economy to be “fully functioning” when the process of circulation of money within the economy takes into account the needs and desires of all consumers as well as the capacity of the businesses that generate the bulk of the economy’s output. It is said that in a truly efficient economy, demand and supply conditions are in equilibrium. More money is demanded than is supplied, keeping the equilibrium of prices and income levels as desired.

Although markets are often called the “force behind” an economy, it is not the market alone that determines the state of an economy. Factors such as productivity growth, inflation, government spending, business cycles, governmental policies, international trade, technology, demographics, living standards, housing development, and attitudes toward money and credit are all important in the determination of the course an economy will take. Household management and economic systems have much to do with each other as well. If household spending patterns are out of step with the general direction of the economy, household budgeting problems can quickly make the economy go into recession.

Unlike traditional economic systems, modern economies attempt to use the information contained in the pricing data to both create and distribute the goods and services that are produced in their economies. For example, unlike the price system in traditional markets where what you pay for a commodity is simply the best estimate of the value you will receive, economies attempt to take into account the current state of the balance sheets of various companies. The same is true of the value of human life: as long as the supply of goods and services exceeds the demand for them, there is no problem. However, if the supply exceeds the demand, the result will be inflation and growing shortages in both the quantity and quality of the goods and services that are produced in an economy.