An economic system is any system of producing, distributing, and using goods and services. It includes all of the activities involved in providing people with what they want and need to live in a comfortable way, such as food, shelter, clothing, and entertainment. The economy also includes a nation’s financial systems, such as banks and stock exchanges, and all of the production processes, such as mining, assembly lines, factories, labor saving devices, markets and anything else that goes into the making and trading of goods and services. The economy is a dynamic system, meaning that it can change in response to new inputs and outputs. Some of the most important changes in the economy have been brought about by inventions such as antibiotics, vaccines, computers, and automobiles.
The word “economy” comes from the Greek word for household management, and the study of economy grew out of this tradition in 18th century Europe. Modern economists believe that there are certain principles that can and must be applied to all economies, no matter their size or location. These include the laws of supply and demand, the fundamentals of trade, and the interplay of households, businesses, and government.
In a market economy, people work to produce goods and sell them in order to buy the things they need and want. The most obvious part of the economy is money in, goods out (Figure below). Another part of the economy involves taxes—people pay taxes when they work to pay for the public goods and services that governments provide, such as highways, police, schools, social security, unemployment insurance and the like.