Distribution and Consumption

Economies vary widely due to differences in technology, culture, type of economic system, and many other factors, but they all share a set of core activities. When these are combined, they form the generic economic process.

This is summarized in the following figure.

The economic process: distribution and consumption
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The economic process: distribution and consumption. In any economy the four major economic activities are allocation and production, and distribution and consumption.

The physical aspects of this process are indicated by the solid arrows in the above diagram. Inputs such as natural resources, machines, and labor are converted by production into final outputs, and these outputs are then consumed.

The social aspects of the process are indicated by the dashed arrows.

Allocation refers to decisions that determine which inputs will be used to produce which outputs. This is critical to the economic process because it is the starting point for all subsequent activities.

The other social aspect of the economic process is distribution, which determines by whom, and in what quantities, outputs will be consumed. (ENL in fact broadens the concept of distribution to include labor and wastes. For simplicity, this is ignored in the depiction above.)

Consumption is the economy’s purpose, or end, whereas allocation and production are means used to achieve this end. Without understanding the value concepts associated with the purpose of economic activities there would be no basis for understanding production and cost, and thus no rational grounds for allocation decisions.

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