Question 1. What are the vital functions of an Economy? Explain the price mechanism.
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 Functions of an Economy:-
Production, consumption and growth are vital factors of economics. Economies might differ in the organization but all perform these three functions which are discussed below. 1. Productions:-
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. Three different types of production are known as the creation of form utility. Place utility and Time utitilty. 2. 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. 3. Growth :--
Economic growth is "the process whereby the real per capita income of a country increases over a long period of time." We itemize 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...
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