Question

How does the economy work?

Answer 1

Your question is too broad. It took me two 48-hour courses to learn the basics of how the economy operates.

While it is interesting and I do not wish to discourage your curiosity, please make the question more specific.

For now, all I can say is that the primary function of an economy is integrating the 4 factors of production - Land, Labor, Enterprise and Capital - to produce goods profitably. This is made possible through the interactions between the consumers (also the labor), private firms, financial sector and the government sector. I would suggest watching a video on the circular flow on income on YouTube for more information on these interactions.

Furthermore, economics is concerned with solving the basic economic problem, which is the existence of unlimited wants in relation to the limited resources available on our planet. This leads us making choices (which wants to satisfy through production and consumption) and making sacrifices (which wants to give up as there only a limited amount of resources available). Economics in general deals with attempting to get the most out of the resources available. It deals with anticipating consumer behavior, trends and using this analyzed information to make decisions.

The last thing you should know is that economics is most broadly categorized into two field - Macroeconomics and Microeconomics.

Microeconomics deals with the interaction between individuals, i.e., individuals firms/industries, consumers. This deals with such things as factors affecting the demand of goods, the concept of elasticity, factor affecting supply of goods, the marginal utility theory and so forth.

Macroeconomics deals with the economy as a whole - this includes concepts such as national income (GDP), aggregate demand and supply, the multiplier effect, the factors affecting consumption, investment,government expenditure and net exports, the exchange rate systems and Balance of Payments.

P.S. In the above answer, I have only briefly mentioned the basics. If you would like further understanding of the basics then please YouTube/Google each economics term listed above.