2. INTRODUCTION
• Essential or Vital Processes of an economy mean
those necessary economic activities which is carried
out by human beings to satisfy their needs .the
economic activities produce goods, give services
that people need or wish. without these activity an
economy cannot exist or work.
There are three essential processes of an economy,
4. • In Economics, production mean any economic
activity which is directed to the satisfaction of the
wants of the people. Whether it is the making of
material goods or the provision of any service, it is
included in production, provided it satisfies the
wants of some people. Thus, in Economics, if
making of cloth by industrial workers is production,
the service of the retailer, who delivers it to the
consumer, is also production.
• Similarly, the work of doctors, lawyers, teachers,
actors, dancers, etc., is productive, since the
services provided by them satisfy the wants of
those who pay for them.
5. • For an economy to exist, production of goods and
services is very essential. The standard of living or
the consumption standard of the people depends
on the volume and variety of production.
• Richness or poverty of a country is dependent upon
the amount of goods and services it is able to
produce.
• E:g The United States of America is the richest
country in the world and its people enjoy the
highest living standards because its level of
production is the highest. India is a developed
country because its level of production is very low.
In order to make India rich, we shall have to step up
the rate of production in the, economy.
6. • Goods that are produced are of two types.
• Consumers’ goods: Consumers’ goods are those
goods which are used by the consumers for direct
satisfaction of their wants. Bread, clothes, shoes,
tea, coca-cola, etc., are all examples of consumers’
goods.
• Producers’ goods: Producers’ goods are those
goods which help in producing further goods. The
producers’ goods do not satisfy the wants of the
people directly but they satisfy their wants
indirectly by helping in producing consumer goods.
8. • The process of fulfilling wants and desires by consuming
goods and services is called consumption.
• Consumption also includes consumption of goods and
services, we consume food, clothes , furniture etc. we use
services of barbers, tailors, teachers, etc.
• Consumption activity take place as soon as we buy these
goods and services.
• It is the quantity and quality of consumption which
constitutes the standard of living of the people. Consumption
is the act of satisfying one’s wants. Producers make goods in
order to satisfy the consumption wants of the people. If no
one consumes, no one will produce. Consumption is thus the
end of all productive activity.
• level of national income and employment depends upon the
level of aggregate effective demand. Consumption is one
constituent of this aggregate demand. Changes in propensity
to consume of the people will bring about changes in income
and employment in the country.
10. • All that an economy produces may not be
consumed. In fact, an economy must consume less
than what it produces if it wants to grow or
develop. The excess of production over
consumption in a year is called saving and this
saving is invested in further production so the
Investment may be defined as “The addition made
to the total stock of capital (including inventories) in
a year.”
11. • it is the level of investment on which depends the
level of employment in the country. Fluctuations in
economic activity or what are called business cycles
are mainly due to fluctuations in investment. The
higher the level of investment, the higher the level
of income and employment in the country.
• Investment can take two forms:
• 1. inventory investment
• 2. fixed investment.
12. 1. inventory investment
• The economy may accumulate stocks of finished
consumer goods, materials and ‘goods in process’ in a
year. These stocks are called inventories.
• If the rate of production of goods and materials is
greater than the rate of their consumption, there will
be an increase in their inventories and inventory
investment will be positive.
• On the other hand, if consumption is going on faster
than production, there will be decrease in these
inventories and it will be negative.
• The addition made to the total stock of finished goods,
materials and ‘goods in process’ is called inventory
investment.
13. 2. fixed investment.
• The excess of production over consumption can also
take another from which is called fixed investment.
• There are certain goods called ‘fixed capital’ as
industrial machinery, plants, tools and implements,
factory buildings, etc., which are not produced to
satisfy the wants of the consumers directly. Instead,
they are produced to serve as aids in the process of
producing consumers’ goods.
• Addition made to the total stock of fixed capital in a
year is known as fixed investment.
