Question

1) Briefly explain the relationship (the connection) between production, consumption and standard of living.

2) Under normal circumstances what does the LAW OF DEMAND tell us? Draw and fully label a simple demand curve using an actual product or service, and briefly explain “what is happening.” Use your own example.

3) List 4 economic inputs

Answer 1

1)

Before knowing the relationship between production, consumption and standard of living, Let us know the definition of these 3 terms with examples.

1. PRODUCTION: Production in Economics means quantity produced of any commodity using factors of production that is, Land, labour, capital. You can change raw materials into something useful which has price and which can be sold in the market.For example if you want to make a pot of clay, you cannot produce clay (soil), it is there in nature. But you can add other factors like skilled labour and give it a final design and then finally sell the finished product at the price which would cover all the costs.
2. CONSUMPTION: Consumption is typically defined as final purchases by an individual that are not investments of some sort. Other economists define consumption much more broadly, as the aggregate of all economic activity that does not entail the design, production and marketing of goods and services. For example when you buy food, clothes, a hair, airplane tickets, a car, etc., that's consumption.
3. STANDARD OF LIVING: Standard of living or quality life means that you have access to all the required basic necessities ,comfort , material good , be satisfied with everything you have , enjoying your life. It depends from person to person and countries to countries.

Relationship (the connection) between production, consumption and standard of living.

Production and consumption are intertwined. Paraphrasing Say’s Law, one must produce in order to consume, hence our consumption is fueled by our production. Likewise, our production is also fueled by someone else’s consumption. Ultimately, one’s standard of living is lifted not by how much one produces, but by how much one consumes.

For example: It is no accident the United States, with only 5% of world population and one of its highest living standards, consumes 25% of total global energy. It has long been observed that the higher a country’s per capita consumption, the more prosperous that country is.

To conclude, we can say that Production and consumption are, therefore, essential economic activities which must go on in an economy continually in order to improve the standard of living.

2)

BY DEFINITION: The law of demand states that other factors being constant price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.

Under normal circumstances, the LAW OF DEMAND tell us the consumer choice behaviour when the price changes. In the market, assuming other factors affecting demand being constant, when the price of a good rises, it leads to a fall in the demand of that good. This is the natural consumer choice behaviour. This happens because a consumer hesitates to spend more for the good with the fear of going out of cash.

Let us take the example of NESCAFE, which is the instant coffee by Nestlé.

PRICE (P) ($)	$10	$20	$30	$40	$50
DEMAND (D) (Units)	105	85	65	45	25

The graph shows that when the price of coffee increases the demand of that coffee decreases and vice versa, like we see in the graph when the price is $20, the demand is 85, but when the price increase to $ 50, the demand falls 25 to hence demand and price are inversely related.

3)

Four main factors of production: land, labour, capital, and entrepreneurship/Enterprise.

Land is short for all the natural resources available to create supply. It includes raw property and anything that comes from the ground. It can be a non-renewable resource. That includes commodities such as oil and gold. It can also be a renewable resource, such as timber. Once man changes it from its original condition, it becomes a capital good. For example, oil is a natural resource, but gasoline is a capital good. Farmland is a natural resource, but a shopping center is a capital good.

Labour is the physical effort you require to employ. Labour refers to the various efforts that an individual faces to bring a product or service to the consumer market, which may well take place in many ways. The labor of production itself in which, for example, a farmer grows certain fruits is work; but also the collection and conduction of said fruits to the place where they are processed, and from there to the industry that turns them into food. The same happens with the person in charge of distributing these foods, and of selling them to potential buyers. Services are also working, so that a company in this sector offers its clients, essentially, a specialized type of work.

Capital is the financial resources you would require to employ Land and Labour. Capital is short for capital goods.These are man-made objects like machinery, equipment, and chemicals that are used in production. That's what differentiates them from consumer goods. For example, capital goods include industrial and commercial buildings, but not private housing. A commercial aircraft is a capital good, but a private jet is not.

Entrepreneurship, the fourth factor also known as Enterprise, is the capability or the intellectual effort to make use of the rest of factors on the right time in the right proportion with required discipline. It is useless to have capital and land if you do not have the specific knowledge to sow, or if you sow in such a way that inputs are wasted and profitability is minimal.