by Stephan Smith on November 10, 2010

You can find this term everywhere. You hear news anchors talk about it on television, you see it in newspapers and on websites, you hear about it from your loved ones and friends and you even feel the affects of it in your daily life. The term I’m talking about is ‘economy‘. The economy affects everyone in society and even those outside that society. You hear the term ‘economy’ from many sources, but what exactly makes up an economy. What is it? Just continue to read and you will learn exactly what an economy is.

What is an Economy?

An economy is a society that produces and consumes goods and services. That’s all it is. *Sigh of relief* As I type this I thought it would be somehow more difficult to explain. Luckily, that isn’t the case. A society that produces goods and services from its limited resource pool and consumes goods and services make up an economy. It’s important to point out that a society has ‘limited’ resources at its disposal. That’s why a society has to economize. It has to make the most out of its limited resources. As to how a society decides what to produce from its limited resources leads me to my next point.

Types of Economies

There are a variety of so called economic strategies that help societies know what to produce, how to produce it, how much to produce, what resources should be used and how much resources should be used in the production of the goods are services. One such economic strategy is called Capitalism or Free Market system or Free Enterprise system. In a capitalistic system, market forces dictate which goods and services should be produced and the quantity at which they should be produced under the influence of profit or gain.

If a man sells ice cream and there is demand for it, then people will buy it. No one told the man to sell ice cream. The market indicates to him to sell ice cream because there is demand for it. Now if another man starts making ice cream using better ingredients (or better resources) and offers the ice at the same price, then more people will buy from the second man than the first man.

As you see in this little example, the market determines how something is to be made by the shifting of demand. The market forces also control prices, for if the second man increased the price of his ice cream too greatly, then demand would shift right back to the first man. The men I used in this example looked to fill the demand for ice cream, not for the sake of filling the demand, but to get something out of it…profit. Like I stated previously, this system, the capitalistic system, operates under the influence of profit.

Other well known types of economic strategies used by societies are participatory systems, socialistic systems and communistic systems. There are many more economic strategies out there besides the ones I’ve listed.

A Wealthy Economy and Society

The various types of economic strategies listed above are all theories and methods on how to best allocate limited resources in the most effective way in order to obtain economic stability and hopefully economic prosperity. But what makes an economy prosperous? Is it the money that is in circulation? Is it the established government? No. The answer to that question requires two parts. The first part is output. Economic wealth and prosperity is heavily reliant by the economy’s output. The more goods and services an economy produces the more wealth that economy potentially has. When an economy’s output starts declining, citizens, the established government and the country’s central bank will start panicking, for declining output is a precursor to economic issues such as an increasing unemployment rate and financial poverty.

The second part to this two part answer is consumption. There has to be consumption of the goods and services in order for output to grow. If an economy produces goods and services and no one consumes those goods and services, then the economy will produce less until there is a good ratio between output and consumption. The more consumption, the more output. Output is dependent on consumption and economic wealth is dependent on output.

You also may be interested in:

  1. Economics
  2. Money
  3. Goods and Services
  4. Inflation

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