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Economics Its Vital Processes And Basic Problems

Economics Its Vital Processes And Basic Problems

An economy refers to the financial system of the region, province or nation. "It is a system by which folks get a livelihood." For instance the "Economy includes farms, factories, mines, shops, banks, roads, railways, aircrafts, offices, schools, cinemas etc., which grants the people with the goods and services which they also use themselves or sell overseas in order to be able to buy imports." Sir John Hicks "An economy consists of nothing else but an enormous cooperation of workers or manufacturer to make things and do things which clients want."

The Vital Processes of An Economy

Production, consumption and growth are vital factors of economics. Economies might differ in the organisation but all perform these three functions which are discussed below.

  • Production -

  • The First vital process of an economy is manufacture which must go on incessantly. "Production comprises any action, and the stipulation of any service, which satisfies and is likely to satisfy a want." In this wider sense, production includes products produced on farms like rice, wheat, fruits and vegetables and those manufactured in the factories like clothes, electronic goods, electrical items etc. It also includes the services of shopkeepers, traders, transporters, actors, doctors, civil servants, teachers, engineers and akin to who help in fulfilling the needs of the people in the economy through their services. But production eliminates certain goods and services though they satisfy human needs. It includes, domestic work done within the family by the housewives, husband and children, production of hobby articles like paintings, production of vegetables in the kitchen garden. The last is voluntary work. John Hicks defines "Production is any activity directed to satisfaction of other people's wants through exchange." Thus production means exchange of goods for consideration of money.

  • Consumption -

  • The second vital process of economy is consumption. It means the use of financial goods and services in the pleasure of human needs. The consumption that goes on in the fiscal may be of different types. Prof. Hicks organized it into two grouping - single-use goods and durable-use goods. Single goods are those which are used in a single act. Such goods are food stuffs, cigarettes, matches, fuel etc. durable use goods are those which can be used for a substantial period of time. It is unimportant whether the time is short or long. Such goods are pens, bicycles, clothes, fans, furniture etc. Prof. Brown defines as "For every kind of completed goods, in reality there is a kind of channel or rather a system of pipeline, elongating from the unique sources of resources used to the consumer." The accretion of stock of such goods is called inventory investment.

  • Growth -

  • Economic growth is "the process whereby the real per capita income of a country increases over a long period of time." We itemise the factors which lead to the growth of an economy." Growth of population predominantly 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. On the other hand, the enhancement in the productivity per head of developed economies like United States has been much higher because of their low rates of their national product. Technical acquaintance and development are the twin features in mounting productivity per head. Technical knowledge and development are autonomous It is technical knowledge which brings about new means of production, leads to innovation and growth of new equipment. The supply of savings is another factor that determines the growth rate of economy. Borrowing from abroad is another source of capital for the growth of economies. External borrowing is resorted to for two reasons. To supplement low domestic savings and to get foreign currency for the purpose of importing capital for development purposes. Thus all economies whether they are capitalist, socialist or mixed perform these important functions of production, consumption and growth.
Central Problems of Economy

There are five fundamental questions relating to the problem of economy and they are discussed below.

  • What to Produce and in What Quantities?

    To make a decision of what goods and services are to be created and the volume of productivity has to be determined and this is the first problem relating to economy. This involves allotment of scarce resources in relation to the composition of total productivity in the economy. Since resources are inadequate the society has to decide about the goods to be produced. If the society gives significance to the production of more consumption goods now, it will have less in future. A high precedence on capital goods implies consumer goods now and more in future. But since resources are inadequate, if some goods are produced in abundance, some other goods will have to be produced in smaller quantities. It will therefore have to choose among mixture which will give higher level of satisfaction.

  • How to Produce these goods?

    The next problem is how to fabricate these goods. That is the techniques and methods to be applied in the production of the necessary goods. This problem is principally dependent on the accessibility of resources within the economy. If land is available in abundance, it may have widespread cultivation. If the labour is in abundance, it may use labour demanding techniques while in case of labour shortage, capital intensive techniques may be used. On the other hand easy consumer goods and small outputs necessitate small and less costly machines. Further it has to make a decision of what goods and services are to be created in the public sector and that in private sector.

  • For Whom are the Goods Produced?

    The third basic problem is for whom the goods and services are to be produced. That is the allotment of goods among the members of the society. The allotment of basic customer goods or supplies and lavish comforts and among the household takes place on the basis of among the allocation of country's income. A rich person may have a large share of the lavish goods and a poor person may have more amounts of the basic consumer goods he needs.

  • How efficiently are the resources being utilised?

    This is one of the significant basic problems because of having made the three earlier decisions, the society has to see whether the capital it owns are being utilised fully or not. In case the resources of the financial system are lying idle. It has to find out ways and means to use them fully. If the idleness of resources, say man power, land or capital is due to their male allocation, the society has to adopt such monetary, fiscal or physical measures where this is corrected. In an economy where the available resources are being fully utilised, it is characterised by technical competence or full employment. To maintain it at this level, the economy must always be increasing the productivity of some goods and services by giving up something of others.

  • Is the Economy Growing?

  • The last and the most imperative problem is to find out whether the economy is growing through time or is it sluggish. Economic growth takes place through a superior rate of capital configuration which consists of restoring existing capital goods with new and more productive ones by adopting more well-organized production techniques or through modernization. Economic growth enables the economy to have more of both the goods.

All these central problems of a financial system are interconnected and mutually dependent. They arise from the essential fiscal problems of insufficiency of means and array of ends which lead to the crisis of choice or economising of resources.

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