What is an Economy?

September-15-08
8:34 AM
An economy can be best be described as a self-sustaining system in which many independent
transactions (often triggered by self-interest) create flows of money and products.

AN ECONOMY...

• Is a very complex or intricate system

• Is dynamic of subject to movements and exchanges
• Consists of interdependent people, groups, and institutions, each performing specialized roles
• Involves a series of independent transactions motivated by economic goals
• Involves numerous transactions that create 2 circulars flows ( money moves in one direction while goods
and services more in opposite direction.

The 3 Basic Economic Questions

What to produce?
• What goods and services should our society produce, and in what quantities?
• What is worth producing and what is not?
• What are we giving up in order to produce these goods and services

How to produce?
• By whom, with what resources, and in what way should these goods be produced?
• How can out limited resources be used most efficiently?
• Should products be made in small, privately owned factories or in large, state owned corporations?
• How much automation should be used? How much manual labour?

For whom to produce for?

• How will total output be shared among the different members of society?
• Who will get which goods and services? Will products be shared equally?
• On what basis should decisions concerning distribution be made?

Although every economy attempts to answer these questions effectively, the way each question is
answered will help identify the type of economic question.

Economists define the economic system as the set of laws, institutions, and common practises that help
a nation determine how to use scarce resources to satisfy as many of its people's needs and wants as
possible.

The 3 ECONOMIC SYSTEMS THAT HAVE EMERGED ARE:

1. TRADIONAL
2. COMMAND
3. MARKET

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