Fantasy cannot be tightly defined, for that would defeat the very core of fanciful ideas. There are a few ways to describe the term fantasy however.

1. The creative imagination; unrestrained fancy. See Synonyms at imagination.1)
   
2. Something, such as an invention, that is a creation of the fancy.2)
   

Fantasy Literature can be defined several ways. Here's two of the most common ideas.

Fiction characterized by highly fanciful or supernatural elements. 3)

Also, fantasia. Literature. an imaginative or fanciful work, esp. one dealing with supernatural or unnatural events or characters: The stories of Poe are fantasies of horror. 4)

Games that use elements of Fantasy are similar to Fantasy Literature. They are created to a story, or to immerse the player in a world that uses elements of Fantasy.