Briefly explain the three distinct components of economics.
Answers
Three distinct components of economics are consumption, production and distribution. ... GDP is distributed among the agents (factors) of production in the form of wages/salaries, profits, interests and rents.
Answer:
Consumption
Here, we, as students of economics, study behaviour of human beings as consumers or buyers of different goods and services for
the satisfaction of their wants. As consumers, people have limited means, while their wants are unlimited. How do they allocate their given means (or income) to the purchase of different goods and services, (given their market prices) so that their satisfaction is maximised? This is the study of consumption or the study of consumer behaviour. When we formulate a set of standard
relationships (like the inverse relationship
between price of goodand its purchase) explaining how consumers tend to behave, we
call it consumption theory.
Production
Producers also have limited means while they have a wide range of goods and services to choose from for their firms and factories.
Given prices of different inputs, how do they choose such combination(s) which are least expensive, so that they are able to minimise their cost of production. Also, given prices of different
goods, how do they choose to produce those, the production of which offers them maximum revenue, so that their profit (profit = revenue - costs) is maximised. This is the study of production, or the study of producers' behaviour. When we formulate a set of standard relationships (like greater the productivity of a factor, greater is its employment) explaining the behaviour of producers or their production decisions, we call it production theory.
Distribution
As students of economics we are also interested in knowing how income (generated in the process of production) is distributed among those who have worked as agents of production. Who are agents of production? These are owners of factors of production, viz. land, labour, capital and entrepreneurship. A part of income generated will go to the owners of land (used in production)
in the form of rent; a part will go to labourers (for rendering their services) in the form of wage; a part will go to the owners of capital (used in production) in the form of interest; and a part
will go to the entrepreneurs in the form of profits. Distribution of income refers to the distribution of GDP (gross domestic product) among the owners of the factors of production (land, labour, capital and entrepreneurship). What are theeconomic
principleson the basis of which income is distributed among owners of the factors of production? Such a study is called distribution theory in economics.