When we go out for shopping, we have a list of items in our wish list. Items on this wish list yield different benefits for us. And on the other hand, we have a budget to spend. Depending on the benefits we want to get and constraints we face, we make choices we deem as optimum. At a similar budget, the choices can vary depending on individuals' preferences. Apart from these monetary transactions, how we spend our day can also be viewed under the lenses of economics. Money, time, energy - all fall under the rule of scarcity and optimum allocation.
When we zoom out further, and look at this individual, an economic agent, interacting with other economic agents with different or similar sets of choices, we can get a sense of what the market is. And these interactions based on all the choices of all the economic agents make up the market.
In a market, when there is an agent who want to purchase a stuff, there is also an agent who want to sell this stuff. In an usual circumstance, the seller wants to sell it because he knows he can sell the stuff he produced or purchased at a price above the cost of the product. At what markup the seller will be able to sell the product will depend on how many buyers want the product. If large number of buyers find value in owning or using the product, the product will be high in demand. That means the seller can add high markup. If it's the opposite, then there is low markup. In buyers' perspective, the incentive goes the other way around. A low price of a particular product incentivizes the buyers to buy more and high price incentivizes buyers to demand less. If we put this both perspective of buyers and sellers in a graph then we get the law of supply and demand. Obviously there are cases that violates this standard law but those events are often deemed as anomaly or special situations.
This price driven incentives dictate the quantity of production and quantity of specific products consumer demand. Some products' demand and supply is more sensitive to price than others. As we are discussing about price driven incentives, we need to remind ourselves there are other form of incentives too that influence our economic activity.
Now we can zoom out further and see how a country's economy is shaped. A country's economic activity is also limited by its resources and dictated by the policy it takes. A country is governed by a central body which is called the government. The government generates revenue in different forms. Taxes is the primary source. The government also borrows. In most countries, central bank can also print money to finance government's expenditure program but that is also subject to limitation as price stability comes under threat if money supply increases excessively. The government allocates its budget giving some avenue more priority than the others. In any economic system, the country's government is making choices under the conditions of expected return from each avenue and constraints the economy faces (e.g. natural resources, labor force, productivity, money supply).
The government also provides incentives for certain industries, either positive (subsidies, tax rebate etc.) or negative (higher tax, duties etc.) for helping a particular industry to grow or others to cut their production.
Central bank controls the supply of money in the economy that also influences the consumption and price stability.
Government also makes decision to trade with other countries. Some governments promote free trade while others are selective and few are very restrictive. Surplus production of certain commodities in the country are exported while scarce commodities are imported. Here each country act as economic agent in a large global market where economic interaction between countries shape global economy.
So, we come to the conclusion that economy is the study of choices, economy is also the study of incentives and economy is the study of interaction between economic agents.