An economy is the total societal production of goods and services. This includes all the crops and livestock that become food, the mining and manufacturing that becomes consumer products and all the people that provide services to each other. There are also different types of economies: market-driven, command-based and mixed. Regardless of the type of economy, all economies are affected by global forces and can be influenced by government actions through fiscal and monetary policies.
In a market-driven economy, the law of supply and demand affects prices and total production. When there is more demand for a particular product, its price will rise and production will increase to meet that demand. This process can be sped up or slowed down by a variety of factors. For example, a shortage of raw materials may cause the cost to increase or a natural disaster could slow down production and lower prices.
Households, businesses and the government all contribute to an economy in a number of ways. Businesses produce goods and services that make up the economy’s output, creating jobs and paying taxes that form a main source of income for the government. Households purchase those goods and services, generating consumer spending that is another important aspect of the economy’s output.
The modern study of an economy began with the Scottish moral philosopher Adam Smith and his 1776 work, The Theory of Moral Sentiments and Wealth of Nations. He developed the notion that free trade was based on human self-interest and helped popularize the concept of an economy.
About the Author
