What are the vital functions of an Economy? Explain the price mechanism. Answer:- 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 aka 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 he factories like clothes, electronic goods, electrical
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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 fines “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 utility. 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. Proof. 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. Proof.
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 :- 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 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. PRICE MECHANISM:- Every commodity has its own price determined by its demand and supply in a free market. There are many prices as there are goods and factors of production.
All the prices are collectively called the price mechanism or the price system. The price mechanism requires the existence of free market forces of demand and supply. The price mechanism also known as the market mechanism helps to solve the central problems in capitalist economy. The price mechanism is a system of determination of prices and resource allocation. It operates in a free market situation where forces of demand and supply acetate prices. It is the process by which changes in prices guide and shape changes in the value and types of the goods and services that are produced.
The price mechanism will determine: The price mechanism determines what is produced, how much to produce and for whom to produce it for. If the price mechanism is to work it must simultaneously fulfill several functions:-The Signaling function and Incentive Function, Rationing function and allocation function. Every economic activity is controlled, directed and guided by the price mechanism in a free enterprise economy. Prices, wages and profits are supposedly determined by demand and supply in free markets.
The price mechanism will be most efficient if certain essential conditions are fulfilled. Question 3:- Describe the Kinds of Economic Systems? Answer:- kinds of Economic Systems are:- The economy if an isolated village in which every family attempts to produce everything to satisfy all its needs is an example of simple economy. There is very little trade or exchange. Till few decades ago, Indian villages were self contained and self sufficient economies. Compare to village economy, the economy of a city like Bangle or Iambi is extremely complex.
In complex economy there is a high degree of specialization and extreme dependence of each one upon everyone else. Developed, Undeveloped and Developing Economies:- An advanced or developed economy is one which carries on production with large amount of machinery and advanced techniques. In An undeveloped economy production is carried on with a relatively small amount of capital and with primitive and old techniques. The productive efficiency of a developed country is very high and per capita income is also high.
In an undeveloped economy production is carried out with a relatively small amount of capita and with primitive and old techniques. In undeveloped economy level of real income and capita per head of population are extremely low. All undeveloped countries are not in the same degree of economic development. Some are primitive but some have already taken steps towards rapid economic growth. The latter have commonly come to known as developing economics. India is a good example of developing country. Capitalist, Socialist and Mixed Economy:-. A capitalist economy is also known as the free enterprise economy.
The socialist economy is one which all the means of production are owned and operated by the State on behalf of the community and predominant motive force of economic activities are controlled, regulated and guided by the government according to a pre determined plan. We have the mixed economy which attempts to combine the good features of both capitalism as well as socialism without the defect of either. In mixed economy Many European countries and also the United States of America are redeployment capitalist economies. The U. S. S. R, China and East European countries are socialist economies.
India has chosen the middle path, and it is known as Mixed economy. Question 5:- What are the factors governing Price Elasticity of Demand? Explain. There are a few factors that Govern the Price elasticity of Demand (I. E. How responsive quantity demanded is to changes in prices) for a particular good is: – The number of substitutes available. If there are many substitutes for a particular good, the good will be much more elastic (I. E. Quantity demanded will be more responsive o price changes). This is because a raise in price of one good will mean consumers can simply purchase a substitute good instead which is cheaper.
Therefore, a raise in prices would mean a proportionately larger decrease in quantity demanded. – The income is spent on that good, any increase in prices will mean that the consumer will be more likely to go and look around for substitutes that are cheaper to save money since so much money goes into purchasing that good. Therefore, the larger the proportion of a consumer’s income spent on that good, the more elastic the demand or the good will be (I. E. Quantity demanded is more responsive to any price changes). – The more different uses a particular good has, the more inelastic it will be.
For example, electricity has many uses, and therefore tends to be quite inelastic (quantity demanded is not very responsive to price changes). – Necessity goods (I. E. Goods that are needed by consumers such as rice, bread, etc. ) are generally more inelastic. Luxury goods (e. G. Mobile phones, laptops, etc. ) tend to be more elastic – I. E. Quantity demanded is more responsive to any price changes. – Habit-forming goods such as cigarettes tend to be more inelastic (since consumers become addicted to them, they will be less responsive to any price changes). The longer the time period, the more elastic the demand for a good will be. In the short term, for any price changes, the consumer may not adjust his consumption right away. In the longer term, the consumer will look for cheaper alternatives and will therefore decrease their consumption of that good with the price rise. Question 6. Explain economic systems and resource allocation. An Economic system refers to structures in society within which we make sections about:- I) What to Produce? ( goods and services) it) How to produce the goods and services? Iii) Where to produce? V) How to allocate and distribute the goods and services to meet demands The Four main kinds of economic systems are:- 1 . Traditional (subsistence) System 2. Market or Commercial System, 3. Centrally Planned Systems and 4. Mixed Economic Systems. Traditional Economic Systems:- An economic system which people produce Just enough goods to feed their to feed their households with very left for sale or for exchange in the market. Market Economic System:- Under capitalist economic yester what how and where to produce a particular good are determined by market conditions such as supply demand and price.
Socialist or Centrally Planned Systems:- under centrally planned economies decisions regarding what commodity to produce, government rather than the market. Mixed Economic systems combine elements of market and command economics. It is currently the most common economic system. Resource allocation:- Capitalist Economy:-Every Economy has to allocate or distribute its limited resources of land, labor and capital equipment In the production of goods and services. No central authority in capitalist systems. Production depends on producer’s interest.
Price mechanism brings about the most ideal allocation of resources. Socialist Economy: – It has given up the price mechanism but uses central planning and direction for the allocation of limited economic resources. The problems are directly solved by government. The Socialist allocation of resources is not as efficient as it reflects more of the government. A socialist system solves the problem of distribution of goods and services. A Socialist economy attempts to solve the three central problems by allocating limited economic and human resources.
Socialist allocation of resources is not as efficient as it reflects more of the government’s preferences. It establishes distributive Justice but it scarifies productive efficiency. Mixed economy:- It combines the features of both capitalism and socialism, allocation of resources in a mixed economy reflects the allocation aspects of both capitalism and socialism. The choice of goods and services depends on the private sector on the basis of price mechanism. It is better since it attempts to combine the productive efficiency of capitalism and distributive Justice of socialism.