Main Divisions of Economics
There are four main divisions of economics. They are consumption, production, exchange and distribution. In modern times, economists add one more division and that is public finance. In public finance, we study about the economics of government. The economic functions of the modern State have increased to a great extent. So public finance has become an important branch of economics.
All the above divisions are interrelated. And they are dependent on each other.
Consumption deals with the satisfaction of human wants. There is economic activity in the world because there are wants. When a want is satisfied, the process is known as consumption. Generally, in plain language, when we use the term 'consumption', what we mean is usage. But in economics, it has a special meaning. We can speak of the consumption of the services of a lawyer, just as we speak of the consumption of food.
In the sub-division dealing with consumption, we study about the nature of wants, the classification of wants and some of the laws dealing with consumption such as the law of diminishing marginal utility, Engel's law of family expenditure and the law of demand.
Production refers to the creation of wealth. Strictly speaking, it refers to the creation of utilities. And utility refers to the ability of a good to satisfy a want. There are three kinds of utility. They are form utility, place utility and time utility. Production refers to all activities which are undertaken to produce goods which satisfy human wants. Land, labour, capital and organization are the four factors of production. In the sub-division dealing with production, we study about the laws which govern the factors of production. They include Malthusian Theory of population and the laws of returns. We also study about the localization of industries and industrial organization.
In modern times, no one person or country can be self-sufficient. This gives rise to exchange. In exchange, we give one thing and take another. Goods may be exchanged for goods or for money. If goods are exchanged for goods, we call it barter. Modern economy is a money economy. As goods are exchanged for money, we study in economics about the functions of money, the role of banks and we also study how prices are determined. We also discuss various aspects of international trade.
Wealth is produced by the combination of land, labour, capital and organization. And it is distributed in the form rent, wages, interest and profits. In economics, we are not much interested in personal distribution. That is, we do not analyse how it is distributed among different persons in the society. But we are interested in functional distribution. As the four factors or agents of production perform different functions in production, we have to reward them.
Public finance deals with the economics of government. It studies mainly about the income and expenditure of government. So we have to study about different aspects relating to taxation, public expenditure, public debt and so on.
We may note that the subject of economics is divided into consumption, production, exchange, distribution, and public finance only for the sake of convenience.
We should not look at it in a rigid way. We must not consider them as watertight compartments. They are related to each other and they are interdependent also. For example, we cannot have consumption without production. The aim of production is creation of wealth. And we produce wealth not for its own sake but for the satisfaction of human wants. In other words, we produce goods because we want them for consumption. So the ultimate aim of production is promotion of human welfare. Production is means and consumption is the end. Generally, people produce goods for market. So exchange takes place. Exchange is the connecting link between production and consumption. The economic welfare of people in a nation depends on how wealth is produced and on how it is distributed. If there is no proper distribution, it will result in inequalities of income and wealth. This, in turn, will affect consumption and production. So we find that all the divisions of economics are interrelated and interdependent.