explain the function of economy answer in brief
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Answer:
The three most important functions of economics are as follows:
Just as feeding, digestion and growth are the vital processes of living beings; similarly production, consumption and growth are the essentials of economies. Economies might differ in their organization but all perform these three functions which are discussed below.
1. Production:
The first vital process of an economy is production which must go on continuously. “Production includes any activity, and the provision of any service, which satisfies and is expected to satisfy a want.” In this wider sense, production includes products produced on farms like wheat, vegetables, pulses, etc. and those manufactured in the factories such as clothes, bicycles, television sets, electric appliances, and the like. It also includes the services of shopkeepers, traders, transporters, actors, doctors, civil servants, teachers, engineers and the like who help in satisfying the wants of the people in the economy through their services.
But the term ‘production’ excludes certain goods and services though they satisfy human wants. First, domestic work done within the family by the housewife, husband or children. Second, production of hobby articles, like paintings.
2. Consumption:
The second vital process of an economy is consumption. Consumption means the use of economic goods and services in the satisfaction of human wants.
The consumption that goes on in the economy may be of various types. Prof. Hicks classifies consumption goods into two categories: single-use goods, and durable-use goods. ‘Single-use goods’ are those which are used up in a single act. Such goods are food stuffs, cigarettes, matches, fuel, etc. They are the articles of direct consumption because they directly satisfy human wants.
Similarly, the services of doctors, bus drivers or waiters are included under ‘single-use goods.’ ‘Durable-use goods’ are those which can be used for a considerable period of time. It is immaterial whether the period is short or long. Such goods are pens, bicycles, clothes, fans, television sets, furniture, etc.
3. Growth:
Now we look at the processes by which economies grow like living things. Economic growth is “the process whereby the real per capita income of a country increases over a long period of time.” We enumerate the factors which lead to the growth of an economy.
Growth of population, particularly working population, is the first cause of growth. A rapidly growing population in relation to the growth of the national product keeps the output per head at a low level. This has been the case with developing countries like India. On the other hand, the increase in the output per head of developed economies like the United States has been much higher because of their low rates of population growth in relation to the growth rates of their national product.
Technical knowledge and progress are the twin factors in increasing output per head. Technical knowledge and progress are interdependent. It is technical knowledge which brings about new methods of production, leads to inventions, and development of new equipment. Similarly, changes in equipment require new technical knowledge for producing and training personnel in their manufacture and use. Thus for an increase in output per head, an economy requires physical capital in the form of improved capital equipment, and human capital in the form of highly qualified and trained personnel.
The rates of growth of technical knowledge and capital depend on the percentages of national income spent on R & D (research and development), of modern technology, and on imparting general and technical education to the people. One of the principal causes of the high growth rates of developed countries has been the spending of higher percentages of their national income on R & D, and on education.