An economy is a place of exchange, production, distribution and exchange of goods and services, by many different agents. In economic terms, it is described as a social community that involve the practices, discursive conversations, and material exchanges related to the production, utilization and control of essential resources. The term economy, therefore, refers to the practices that go on within a community or society, with respect to the exchange of services and goods between individuals and groups, as the basis for the accumulation of wealth and surplus. Economists are interested in the factors that affect the formation and maintenance of economies, the relationships between the production and distribution of wealth, the processes by which surplus is produced and distributed, the possibilities for economic growth and the welfare of the individuals and groups involved.
The term ‘economy’ has a wide range of meanings, depending on the period of time being referred to and the geographical location of the writer. In modern times, most economists consider the modern economy to be a system of private enterprise. Within the modern economy, there are several different forms of private economic activity, including the retail market, the home market, the extended market and the international market. In addition, there are also several other smaller aspects of private economic systems, including technology, scientific advances, the distribution of information, political systems and the legal systems that regulate commerce and money.
Economists who focus on the market economy argue that the process by which economies grow and develop is through the process of demand and supply. When more goods and services are demanded than are available in the supply, prices rise. This is the process by which economies become competitive. By increasing the volume of goods produced, economies are able to meet the increased demand without relying on governmental intervention. By contrast, if the government does not intervene to reduce aggregate demand, economies will suffer from lower levels of employment, income and output.
The theory of economics attempts to explain how the real economy operates. Economists attempt to provide a general explanation of how this particular economy functions by examining how the process of production and demand affects the available goods and services. By observing the way that markets have been established to address these issues, economists can better understand how and why things occur in the world. While economics does describe how things happen within the market, it also describes how those events affect the real world.
One of the key elements for any economic growth process to take place is a consistent and open step by step process. If there are barriers to entry for new businesses and if there are restrictions on the capacity of existing firms to increase their output, then growth will be limited. Similarly, if new businesses cannot gain access to credit and if there are inadequate policies in place to facilitate the flow of capital then economic growth will be hindered. These processes can be seen to have an effect on the functioning of the economy. The existence of open steps and the ability of markets to provide a flow of capital and credit are essential aspects of any economic development process.
Another important element for the functioning of any economy is the level of inflation. High levels of inflation constrain the ability of any economy to expand its economy. Inflation essentially increases the price of goods relative to money. In such cases, a central government or other form of authority needs to step in to provide interest-rate stabilization to bring down the level of inflation.