Meaning and Functions of Economy

With the growth of civilization man’s needs have undergone an increase. The availability of goods and services for fulfilling these increasing needs could have been possible with the mutual co-operation of the persons. The people started doing various types of activities to fulfill their needs through mutual co-operation, like one person started the production of cloth and the other of foodgrains. Similarly, different persons started producing different goods. Certain persons like doctors, lawyers, teachers etc. started offering their services and consumption for satisfaction of wants could have been possible with the help of an organisation or institution. This organisation is known as economy. In the ordinary language, the word ‘economy’ refers to frugality, but in economics this word is not used in the sense of frugality It is referred to that organisation which provides living to common people in a set region under one political set up.


According to Advanced Leaweic Dictionary. “Economy means control and management of the money, goods and other resources of a community or society” Every person in the society is engaged in earning his. livelihood by performing various types of activities. Some are doing service, some are running shop, some are teaching, some sell tea, some .are pulling rickshaw, while others are driving a three-wheeler r a taxi. All this working force produces goods and services while working at their place of work and get remuneration for their work rendered. All those activities which are remunerated are called economic activities. Thus different people, in a country, are engaged in different economic activities to earn theirs living and thus satisfy their wants. In a way all persons, in an economy, are earning their living and thus satisfying their wants either by working as teachers, lawyers, singers, doctors, dancers and thus providing services to the nation. Such an economy can be a family, village, town, district, state, country or the whole world. Thus, economy is the sum total of all economic activities of the society. In other words, economy is a system of production, consumption, investment and exchange for making a living.
In the words of A.J. Brown, “An economy is a system by which people get a living and satisfy their wants.” According to J.R. Hicks, “An economy is a co-operation of producers to satisfy the wants of consumers; on the other hand, remembering that the producers and consumers are largely the same people, we can look upon it as, a system of mutual exchanges.”


Production, consumption, exchange, distribution, investment and saving are the vital processes of an economy.
(1) Production. It refers to the creation of utility in such a way that there may be an increase in the value of the commodity Utility is the want satisfying power of a commodity. There are various forms by which utility can be created in a commodity namely (a) by changing the form, (b) by changing the place, (c) by changing the time, (d) by increasing knowledge and (e) by service. The main factors of production are land, labour, capital and enterprise.
(2) Consumption. It is the direct use of the utility of a good or service for the satisfaction of human wants e.g. eating food, wearing clothes, getting medicine from a doctor etc.
(3) Exchange. In it we study the exchange of goods and services, how prices are determined. What is market? What is trade? Goods and services are exchanged with the help of money.
(4) Distribution. It is an economic activity related to the distribution of reward among various
(5) Investment. Increment incurred in capital is investment. That portion of income which is not spent on consumption but is used for capital formation for nation after saving is known as investment. 1= Y— C = S. Here I = Investment, Y = Income, C = Consumption and S = Savings. Machines, tools, raw material, railways, roads, factories are examples of investment where capital has been invested.
(6) Savings. It is the difference between consumption expenditure (C) and income. S = Y – C. In every country investment depends on savings, more the savings more will be the investment.
(7) Economic Growth. The main objective of an economy is economic development. Economic development brings an increase in income and output. The constant rise in national income and its equitable distribution is most necessary. Economic development depends on capital formation, right use of natural resources, efficiency of labour, growth of agriculture and industry.

In short, it can be said that production, consumption, distribution, investment, saving and economic development are the main economic activities of an economy. The smooth and collective direction of these activities are the essentials of an economy.