There are four main functions of Economics. They are consumption, production, exchange and distribution. But in modern times, we add one more function to it and that is public finance. Public finance deals with the economics of government. Since the economic functions of a modern State have increased to a great extent, public finance forms an important branch of Economics. All the above functions are interrelated and they are dependent on each other.
Consumption is the branch of economics that deals with the satisfaction of human wants. The existence of human wants is the starting point of all economic activity in the world. When a want is satisfied, the process is known as consumption. In plain language, consumption is usage. Thus, we speak of the consumption of food. But in economics we can speak of the consumption of the services of a lawyer or a doctor. Consumption is a study about the nature of wants, the classification of wants, the laws relating to consumption such as the law of diminishing utility, Engel’s law of family expenditure, and the law of demand.
Production means the creation of wealth. It does not mean the creation of matter. For “matter can neither be created nor destroyed”. By production, we mean the creation of utilities. Utility refers to the capacity of a good to satisfy a want. There are three kinds of utility – form utility, place utility and time utility. Production coves all the efforts that are made to provide commodities and services that satisfy human wants. Land, labor, capital and organization are the four factors or agents of production. Under production, we study about the laws, which govern factors of production. For example, we have the Malthusian theory of population, and the laws of returns. We study about other things like industrial organization and localization of industries.
No one person or country can be self-sufficient. This gives rise to exchange. Exchange deals with the giving and taking of one thing for another. Goods may be exchanged for goods or for money. Here we have to study about the functions and characteristics of money for it is a medium of exchange in the modern economy, the role of banks, price determination and so on. We have to study about international trade too.
Here we study how the wealth that is produced by the combination of the four factors of production namely land, labor, capital and organization is distributed among them by way of rent, wages, interest, and profits. It should be remembered that in economics, we are not interested in personal distribution, that is how wealth is distributed among different persons in the country. But we are mainly interested in functional distribution. The four factors of production have definite functions to perform and they have to be rewarded according to their functions in production.
Public finance deals with the economics of Government. It studies how a Government gets money and how it spends it. So in Public Finance, we study about different aspects of taxation, public expenditure, public debt and war finance.
It should be remembered that the subject is divided into consumption, production, exchange and so on only for the sake of convenience. There is nothing rigid about it. The above divisions should not be considered as separate watertight compartments. The above divisions are interrelated and they are interdependent too. For there cannot be consumption without production. The aim of production is creation of wealth. And wealth is produced not for the sake of wealth but for the satisfaction of human wants. In other words, goods are produced for they are needed for consumption. So the ultimate aim of production is promotion of human welfare. Production is the means and consumption is the end. Generally, goods are produced for market. So exchange takes place. Exchange is the connecting link between production and consumption. Economic welfare depends in the first place on the column of production. But it also depends on how the wealth that is produced is distributed among different people in the country. Bad distribution leads to great inequalities of income and wealth, which in turn affect consumption and production. Thus, we find all the above divisions are interrelated and interdependent.
© 2013 Sundaram Ponnusamy