What Is an Economy?

A economy is a specific place of the exchange, production and distribution of goods and services, by different producers and consumers, in relation to their needs and capacities. In economics, it is often defined as a market system in which economic activity takes place on the market, i.e. in terms of transactions between buyers and sellers. The process of economics deals with the analysis of why a country’s economy grows or shrinks, what determines its state, what causes inflation and deflation and how the political or economic systems of various nations affect each other.


Economists attempt to understand the inter-dependence of economic variables and the determination of both macroeconomic aggregates (the sum of all economic elements in a country) and micro economic aggregates (the variations in personal economic activities of an individual). A mixed economy is one in which the output of one sector of a economy influences the output of another sector, creating discrepancies between what is produced and what is required. For instance, when the value of oil is increasing because of rising demand, the price of oil will also increase. The overall output of the economy, however, remains level. A mixed economy may be characterized by the following indicators: the division of total income of workers by the total income of corporations, government spending on infrastructure, taxation and industrial production.

Economists also try to analyze the inter-dependence of economies. One way of doing so is to examine how changes in aggregate demand affect prices of particular goods. Changes in aggregate demand can affect the price of raw materials, for example, thereby affecting the price of capital goods, or affect the employment rates of producers of certain goods. But these changes do not have direct effects on the supply of goods. So, a demand elasticity is a crucial concept for understanding how the economy responds to changes in aggregate demand. An economy in a state of demand equilibrium is one in which changes in aggregate demand do not affect the balance of available goods (with respect to demand, i.e., between supply and demand, both of which are included in the definition of equilibrium).