Basic Economic Activities: Distribution of Goods and Services

Distribution of goods and services plays an important role in the economy. It is the activity that comes after production, and its job is to distribute the goods and services to their points of consumption.

Goods produced do not get consumed in their local markets when production is on a large scale. 

So, they need to be transported to all corners of the market depending upon their requirements. First of all, you may need to create awareness in the market about your produce so that people come to know of it and demand it for their requirements. This involves publicity and advertisement. Then, you need transportation and storage facilities for the goods until they get consumed.

So, distribution of goods and services involves the following major activities:

Publicity:

To acquire demand for your goods, the public should be aware that you are producing so-and-so goods and/ or services. But, how can they know if you are doing your business in a confined zone? Only your neighbours and acquaintances could be aware of your activities.

So, you need publicity for your produce.

This can be achieved through advertisements in all leading newspapers or broadcasts on Radio and TV. 

Information about your products, including their quality and functions, also needs to be publicized through pamphlet distribution and TV advertisements. 

This will encourage interested people to demand your products.

Transportation

Upon receiving a goods requirement, you need to transport them to their designated locations. 

The destination can be either your godown, an agency, or directly to the customer's address.

This can be done either with your own fleet of vehicles or through public transportation facilities, such as carriers, couriers, railway freight services, cargo services, etc.

Storage

Distribution of goods may require storage space and facilities for storing them at destination points or even at intermediary points till actual consumption takes place, to protect them from heat and rain. 

You can't ship each and every requirement separately, since it will not be economical and may delay the supplies. So, storage occupies an important role in the distribution of goods.

So, from the above analysis, you can see that distribution of goods is a very complex economic activity involving publicity, transportation, and storage of goods.

Note:
There can be exceptions, in which case this distribution activity may not be necessary. 

For example, food consumed directly at small roadside eateries, a haircut at the salon, etc., where there is no involvement of distribution activities. It is a case of direct production and consumption.

Basic Economic Activities: Production and Factors of Production

Production is one of the four basic economic activities.

 

Production can be defined as the conversion of resources or raw materials, with the help of other inputs, into usable goods and services. It turns raw materials into finished goods with other inputs.

It is the process of manufacturing, producing, or developing user-friendly goods and services, employing various means and resources that are available in an economy.

Man can not consume goods in their raw form in most of the cases. Even the food grains and other foods require some form of processing to be edible. 

The raw materials and resources need to be processed, tanned, and tamed to be utilised by markets. 

For example, production of cars, buses, trains, etc. requires the steel to be first mined in its raw form, then melted, and moulded to build their frames and shapes. It requires engineering skills, labour force, and financial capital (for purchasing the raw iron/steel, machines and tools for moulding, and for payments to labour, etc). 

Further, it requires the skills of efficient management for the controlling and overseeing of various processes as well as efficient usage of inputs.

So, production implies utilisation of resources as well as the other input factors of production. 

Here one should notice that only those inputs which become a part of the output, or are consumed and used up during the production process, or help in producing those goods are to be treated as the real factors of production.

Factors of Production

There are four important factors of production without which production may not be possible. They are as follows:

• Land,
• Labour,
• Capital and
• Entrepreneurship. 

Now, let me give a brief account of these factors of production as to their importance in production.

1. Land

Land is one important factor of production. Land is used for building plants and factories, offices, and for the cultivation of food grains, vegetables, and plantations, as well as for trees. So, land provides the foundational base for businesses. 

Furthermore, soil fertility is used for agricultural production. Again, land contains rivers and lakes that provide water for production units, besides serving fisheries and internal transportation. 

Land is the base for all our minerals, oils, and other production activities.

2. Labour

Labour is required to perform all physical tasks as well as other skilled operations in order to produce something.

Purely physical labour includes lifting of heavy materials, ploughing of soil for agriculture, construction work, and other unskilled jobs like helpers and servants.

Skilled labour requires special talents in the field through education and training, like engineers, technicians, and draughtsmen.

All of these professionals aid in the production of goods and services as their time and energy are consumed in the process.

3. Capital
Capital is one more important factor of the four factors of production. 

You can't do any business without capital. 

Production requires the accumulation of resources, which are procured by paying money or equivalent before starting any production. So, you have to invest capital before starting production or establishing any kind of business.

Even after accumulating the required resources, you have to pay for the services utilised for land, labour, and other intermediary activities before you may start earning income or profits from the business. 

So, capital is one important factor of production.

4. Entrepreneurship
Even after all your resources and inputs have been procured to start your production, you still need some managerial skills and talents to run your production process. 

You need to organise everything in a planned and systematic manner to enable production. 

You need to know what to produce, how much to produce, and the inputs required for the planned output. 

You should be able to calculate and predict things prudently and efficiently to produce maximum output with the available limited resources.

So, entrepreneurship plays an important role in production, and you can't ignore it. 

Four Basic Economic Activities: An Introduction

When we talk about an economy (say the US economy or the Indian economy), we are referring to its structure, institutions, activities, and development. We think of its standards and position in the world.

Coming to economic activities, there are four basic activities involved:

• Production,
• Distribution,
• Consumption and
• Capital formation.

These are the backbone of any economy. These economic activities create the wealth and purchasing power for the economy. They lead to capital formation also. 

Production

Production refers to the manufacturing of goods or services. 

Though services are not produced, they are created. They are part of projects devised through plans and creativity. So, they can also be treated as a form of production, producing services.

Coming to the point of the manufacturing of goods, most of them are produced from the processing of Raw Materials. It requires processing, refining, shaping, mixing, tanning, manufacturing, cultivating, and many other procedures to make the resources consumable by human beings. All these are done through production. 

Production uses available resources to produce the required outputs to meet people's needs. We always need the production of finished products for sustenance.

Distribution 

Distribution refers to the passage of goods and services from one point to another, or from the producer to the consumer through exchange or transfer. 

It involves intermediary agents also in the process, like distributing agents and courier services. It can also include the bequeathing of assets, transfer of charity funds, subsidies, and free social welfare services, all of which imply economic values.

Consumption

Consumption refers to the activities of buying goods and services for one's needs.

It is the result of our desires and wants, which can be satiated through possession and use of those produced goods or services. So, consumption implies production in most cases. 

Consumption is an unending activity. We always need something to satisfy most of our recurring wants on a daily basis. So, there will be an everlasting consumption activity in any economy at any given point in time. It is a continuous process requiring continuous production of goods and services.

Capital Formation

Large quantities of goods and services produced result in accumulation of stocks and wealth. Further, production uses the factors of land, labour and capital, resulting in wealth distribution to the providers of these factors in return for their use or services, mostly in the form of rent, wages, interest, etc. 

This income again gets used for consumption of goods and services, and the balance income gets reinvested in assets and stocks to form capital for future usage. 

It becomes a recurring circle of production, distribution, consumption, and capital formation, repeatedly, again and again.

So, we see that there are four basic economic activities in a society that impact the economic position and development of any economy.

Let us have a deeper look into each of these activities in our next chapters.

Allocation of Resources and Other Economic Problems: Importance and Need for Allocation of Resources

What is allocation, and why is the allocation of resources important?

Allocation of resources refers to the process of prudently distributing available resources among various options to achieve optimal utility.

The problem or need for allocation arises due to two facts:

a) resources are not sufficient in any economy and 
b) each resource or factor of production has varying uses.

 
So it becomes necessary to efficiently utilise the available resources to their best possible results by choosing among their multiple uses and combinations.

Need for Allocation of Resources

• It is a well-known fact that no economy can be fully equipped on its own to meet all its demands or satisfy all the needs of its consumers. 
• Wants are innumerable and vary. 
• Different wants require different products or services to satisfy them, and they require the necessary resources or inputs to produce those goods and services. 
• But no country can independently produce all the goods and services required by it, nor does it possess all the resources required to produce them. 
• Each one has to depend on its neighboring country for some of its needs and resources.
• So, a country should produce those goods or services that are most efficiently produced and rely on its neighbouring countries for other needs.
• Allocate available resources for producing those goods and services through efficient management.

So, the best economy is one that tries to meet all its needs through better management and efficient allocation of resources to their best and utmost use, thereby depending very rarely on other countries.

As we know, allocating resources to their best possible uses is a very challenging problem. 

For this purpose, you should collect extensive details about the nature of resources, their varying qualities, and the probable ways of using them to produce the required goods and services and obtain maximum beneficial results. You should think in terms of whatever combinations of resources can be tried to produce the required maximum beneficial results.

Major Economic Problems

1) Availability of resources
What are the resources available in the economy? Does the economy have sufficient stocks of all resources required in producing its goods and services? Water, power, minerals, fuel stocks, land, and manpower are some of the major requirements for producing any goods or services. Does the country possess all these resources? To what extent does it have these stocks?

2) Locating the needs and wants of consumers
While producing goods and services, you should first know about the needs and wants of people and the quantum of those demands. Only when you understand the needs and wants in marketing can you start thinking of allocating the resources for their production. Then you will come to know of the gaps between needs and available resources.

3) Knowledge about ways and means of producing goods and services
Once you know the demand for goods and services, you will picture what to produce. 

Then, you should think about the ways and means of producing those goods and services.

You should consider different methods of producing goods and services by using different combinations of resources. The same product can be produced using different combinations of materials, labor, and power. So, you should decide which combinations work out.

4) Locating priorities for production
You should consider preferences in the order of producing goods and services. Which goods and services need to be produced with greater urgency and importance compared with others? Which classes of consumers or regions of demand need more attention than others? You must decide whether you consider food grains and medicines more important than beverages, garments, and electronic goods, or vice versa.

5) How much to produce of each item?
Then, you need to decide how much of each item to produce, considering the continuous demand for many goods and services due to the recurring nature of wants. 

For example, food and water are recurring and continuous requirements, so they need to be produced in vast quantities. Cars and bikes are not in high demand, so they are produced in smaller quantities. Even among cars, certain models and brands are too costly and not sold regularly.

So, you have to know how much to produce of each item. Research which items need to be produced in greater quantities and which in smaller quantities.

6) Factors of Production and choice making
We need to make decisions regarding which factor of production is to be used and in what mix ratio. For example, farming can be done on land either by using manual labour or with the help of mechanised processes. Water can be supplied by digging bore wells, through river canals, or by means of water tankers. 

This way, you decide the means of production.

7) Dealing with scarcity of resources
How to deal with the problem of scarcity? There are two ways of dealing with scarcity, as mentioned below.

• Scarcity leads to choice among available alternatives and also to full utilisation of available resources. So, you should minimise the bad effects of scarce resources by choosing the right product or service at the right time that fits into your model. By doing so, you put your resources to their full utilisation level. 

As a consumer, you will buy what is most important and provides maximum satisfaction. 

As a producer, you will produce those goods and services that are most demanded by consumers, and which are the result of a most perfect combination of resources, thereby increasing your profits.

• The other solution to scarcity is growth of resources. Inventing new means of resources through continuous research and experimentation. Any kind of resource, land, labour, mines, and capital, is always prone to expansion through continuous exploration.

So, these are some of the major economic problems faced by any kind of economy which need to be given utmost attention, whether it is a capitalist, planned, or mixed economy. 

Allocating resources to their best combinations and uses, managing them efficiently, using them to their full extent, and contributing to the growth of resources are some of the best ways of tackling this problem.

Economy - Understanding its Importance: Types of Economy and Stages of Economy

What is an economy?
An economy is a system or organisation wherein economic activities take place. 

It is a man-made system for facilitating the satisfaction of the various wants and needs of human beings through the generation of income and the production and consumption of goods and services.

How does an Economy come into Existence?

The system of the economy was created by people to facilitate their existence in society. They had to follow a structured system of enjoying goods and services in order to survive.

As centuries passed, people had to look for better procedures to satisfy their wants in some way or another and to manage their existence in this world. They needed a system for managing and enjoying resources systematically. Because resources are limited in number and confined to certain regions only, they had to be shared and consumed in an economic manner.

In the primitive world, there was no need for any system as populations were low and confined to places where daily needs were available freely.  

Man used to satisfy his wants randomly on his own. He plucked fruits or dug edible roots from the earth and hunted birds & animals to satisfy his hunger. He used to live near water resources to satisfy his thirst. He covered himself with leaves to protect himself from heat, cold, and rain. He never thought of the need for economic institutions, nor did he possess such kind of knowledge.

But, gradually, he learnt to exchange his goods for items available from others (known as the barter system) and then invented coins and currency, production, distribution, and consumption, gradually, to satisfy his ever-growing needs. 

Slowly, he began learning to save or economize goods and resources as the population grew and natural resources seemed insufficient to satisfy his needs. He developed other means, such as improved farming, manufacturing, marketing, and professional services, to earn income and exchange goods with others, and thus the modern economy and economic systems came into existence.

Notable Features of an Economy

• An economy or economic system is man-made to get a living.
• Economies are always susceptible to changes.
• Economies differ according to geographical, cultural, and available natural resources.
• Demand, Production, Consumption, Saving, and Investment are the important activities of an economy. 
• The producer and consumer can be the same person in an economy, as whatever he produces, he consumes also.

Purpose of Economy

• The primary goal of any economy is to satisfy human wants through interactions among people.
• This involves a process of providing goods and services to consumers through various activities of production, supply, and consumption, all supported by available resources and factors of production. 
• To generate income for those involved in economic activities.
• To locate and distribute the resources. 
• Discover new resources or semi-used ones.
• Strengthen the economy through efficient management.

Three Types of Economy

Broadly speaking, there are three types of economy:

Capitalism, Socialism, and Mixed Economy.

 

Let us look at the salient features of these economies.

Capitalist Economy

• Under a capitalist economy, producers are free to make decisions without any interference from government mechanisms.
• They own the property and resources (acquired by them). There are no restrictions as to ownership and boundaries.
• Profit earning is the main force driving the capitalist economy. Producers are interested in increasing their profits, and consumers are interested in availing utmost satisfaction.
• But the capitalist economy has the drawback of monopolising the markets.

Socialist Economy

• Under socialist economic conditions, the common cause of society is considered a more important factor.
• The government interferes in all matters and sets norms and guidelines for producers and businessmen.
• All resources are owned by the government in the interests of the public, and they are allotted to producers and manufacturers according to some procedures and laws established by the government in the interest of the public.
• Social welfare is the main goal in this kind of economy rather than the profit motive.

Mixed Economy

• This is a mixture of capitalism and a socialist economy. The good features of both economies are combined together to form a mixed economy.
• In this mixed economy, both private and public participation are present.
• More essential resources and factors of production, along with business activities, are controlled by the government through the creation of public enterprises and corporations.
• Price mechanisms are controlled by the government, fixing prices of essential commodities and controlling hoarding and black-marketing, etc.
• Annual plans and long-term plans are made by the government to control all financial and economic activities.
• This mixed economy is a good type of economy for the development of society, if both the government and businessmen manage honestly.

Economy vs Economic Development

The economy of any place gets identified by its developed, undeveloped, or underdeveloped nature. 

So, economic development is the standard for identifying economies at any given time.

Meaning of Economic Development

Economic development refers to the overall growth of an economy. It means that the people living in that economy are enjoying a good standard of living by being able to earn ample income, satisfying almost all of their wants. 

Some of the salient features of economic development include the following.

• It is not simply limited to a mere growth of income and standard of living. 
• Economic development implies that people are living a better life in every aspect of life. 
• There is a reduction in poverty, unemployment, and diseases. 
• The gap between rich and poor gets narrowed with more opportunities created to earn income and acquisition of wealth made accessible to the poor also.
• There will be control over population growth and hygienic conditions of the environment.
• The overall expenditures of public and governments will be within the limits of available income and resources.
• A state of improvement in technology and trade relations has been achieved.

Three Stages of Economy Based on Their Development

Based on economic development, economies can be classified into developed, underdeveloped, or developing ones. 

Let us take a look at the features of these economies:

Developed Economy

A country that has achieved strong economic growth and enjoys a relatively high standard of living and quality of life, with higher per capita income, is known as a developed economy. Such countries typically have higher levels of education, better amenities, and lower mortality rates, among other characteristics. 

Indicators of a developed economy include GDP (Gross Domestic Product), Gross National Product, Advanced infrastructure, and the level of industrialization. 

Countries such as the USA, UK, Germany, Japan, and Australia are examples of developed economies.

Underdeveloped Economy

Countries with poor growth and poor standards of living are classified as underdeveloped economies. They are characterized by very low GDP, low per-capita income, poor amenities and standards of living, and high mortality rates. But most of these countries have now moved to the class of developing countries.

Developing Economy

This group consists of all those countries that are still developing but have moved out of the underdeveloped category of economy. 

These countries are characterized by declining growth rates and standards of living, major disparities, and wide economic gaps between classes of people and regions. Resources in these economies are not fully utilized or tapped. 

Countries such as India, Pakistan, Sri Lanka, Brazil, and Mexico are among the many developing countries. But India is developing fast now and reaching the status of a developed economy.

Characteristics of Human Wants

As discussed earlier, human wants are desires backed by some purchasing power. Now, these human wants have many characteristics of their own, and different levels of satisfaction capacity. 

Let us look at some of these characteristics of human wants.

Wants are Unlimited in Number
Just like desires, wants are also unlimited. If you satisfy one want, another want arises, and it is an endless process. But your resources are limited, and so, you can not satisfy all your wants. Ultimately, you will satisfy some most urgent wants and postpone the others for later periods.

Some Wants are Recurring in Nature
Many wants are of recurring nature. They need to be satisfied again and again at intervals. For example, hunger needs to be satisfied 3 or 4 times in a day. Maintaining a good look of your face and head requires periodic haircuts, shaving, applying lotions, creams, and face powders. All these are examples of recurring wants.

Wants are Satiable
We know that we can satisfy most of the wants to their utmost satiety at any given point in time. We satisfy every single want to its full extent. We are satisfying hunger, for example, by consuming a plate of meal or two, or at most by eating three plates. Likewise, we satisfy thirst by drinking one or two to three glasses of water for that particular occasion. 

So, wants get satisfied to their full extent at any given point in time.

Wants are sometimes Free Wants (Economic and Non-economic Wants)
Some of the wants get satisfied without having to pay anything in return. For example, air, water, sunlight, and nature's beauty are all free wants. We need not pay anything to satisfy these wants. 

But, with time, they may become non-free items: 

We pay for bottled water, oxygen cylinders, and the like. But, basically, some of these wants are free and known as non-economic wants; while other wants (paid wants) are classified as economic wants.

Present Wants have an edge over Future Wants
Most of us give more weight to satisfying our most recent and present wants, and postpone other future wants due to the reason of limited resources available to us in satisfying them. So we give more importance to our present wants.

Wants Change according to Place and Time, and from person to person
Wants depend on your place, tastes and likings, and on time also. For example, people living on land can eat rice and wheat meals while people surviving in forests or oceans may have access to animal food only. Further, different people have different wants in different environments. They depend upon culture, civilisation, time, and age. Culture and civilisations determine your food habits. Young people can eat all items, whereas older ones can digest only soft foods.

Wants change with Economic and Technological Development
Advances in the economy and technology greatly affect our wants. Previously, we wanted a radio or a telephone set. Now most of us, if not all of us, want to possess a TV set or a mobile phone as a basic requirement. This is due to progress in the economy and technology.

Thus, we can see that wants differ in characteristics and have varying levels of satisfaction according to circumstances and environmental factors.

Human Wants: How they Differ from Desires, and Get Satisfied?

Here, I am giving some basic knowledge and facts about desires and wants and their satisfaction. To understand Human Wants in Economics and their characteristics, we should first know the difference between wants and desires and be able to distinguish each from the other.

What is Desire

All human beings have desires. They are like natural instincts or longings. We desire to be rich, to be healthy, to be happy, and to reach a high status and position in society. We like to live in a posh bungalow, own a car, dine in 5-star hotels, wear stylish apparel, have a huge bank balance, and travel by air, and so on; it is an endless list. These are all desires and can be had by anyone. Desires and dreams are fantastic things. They can be had at any odd occasion also because they need no price to be paid for having them.

Human Wants

Now, coming to wants. In economics, human wants are desires that are backed by purchasing power. You cannot fulfill all of your desires at any time. You need money or purchasing power to satisfy them. A desire becomes a want when you think of achieving it and try to satisfy it with your purchasing power. You will try to earn income or accumulate wealth in order to satisfy them.

Difference between Wants and Desires

• Desires are natural instincts which start even from birth. Wants are developed from these natural desires, while man grows along with his earning capacity and purchasing power.
• Desires do not require purchasing power for their existence. But wants require to be backed by some purchasing power.
• Desires are infinite in number. They keep on growing always. Wants are also innumerable, but they often develop with your growing capacity and environmental conditions.
• Most of the Desires are left unsatisfied. But, in the case of Wants, most of them get satisfied during your lifetime. 

How are wants satisfied? 

Wants are satisfied by way of acquiring and strengthening your purchasing power. You earn income and accumulate purchasing power to satisfy all your wants. But simple money power is not sufficient in satisfying your wants. 

Other conditions determine the satisfaction levels.

• Wants get satisfied in two different ways. They are satisfied through consumption of goods or by utilising the services of different service providers.
• Some wants are free and do not need purchasing power, like water and air.
• Purchasing a house, car, clothes, food, etc., are examples of some wants satisfied with goods. 
• But these goods alone can not satisfy your wants. You will further require the services of a doctor, a hair cutter, a washerman, a housemaid, and other providers to satisfy some of the wants.
• Again, wants are satisfied with the backup of resources. So, you can satisfy wants as long as the resources are there, not after that.
• Some wants are satisfied with a single consumption, whereas many other wants require recurring and regular consumption, such as eating food, wearing clothes, shaving, haircuts, and others.