Consumption and Demand

Divisions of Economic Activity

Production: The making of goods is production.
Consumption: The way a consumer uses the goods.
Exchange: It is the exchange of goods and services in return of something with monetary value.
Distribution: Distribution is not only of the goods produced but also the resources required to produce. It works within exchange.
Investment: Saving up money to invest in the future. For a consumer it might be saving up money for a house. For a producer it can be investing in better machines or resources.

Production is the process of converting raw materials into useful good/service. Goods/services become useful as they acquire utility value in the process of production.
Producers have limited capital resources while they have a wide range of goods and services to choose from for their firms and factories to produce.
With the given prices of inputs they choose such combinations which minimise cost of production so that they earn maximum profit.

Note

The production data must be always upto date as the needs of the consumer change with time.
Price determination mechanism also plays a major role in the process of production and consumption.

Consumption is that economic activity which is concerned with the use of goods and services for the direct satisfaction of individuals and collective wants.
A consumer is a person who consumes goods and services for the satisfaction of his/her wants. (Satisfaction may vary from person to person)
Consumption activity is the base of all production activities. (Goods which are not consumed by the consumer would not be produced.)

As a consumer has limited income , while their wants are unlimited.
Study of consumption behaviour is concerned with the question "How people use their given / limited means for the purchase of different goods and services, so that satistfaction is maximized?"
In consumption theory we formulate a set of standard relationships explaining how customers tend to behave.
Example
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Indians buying new clothes during the time of diwali.
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Exchange is that economic activity which is concenrned with the sale and purchase of commodities.
In simple terms barter or buying and selling.

When economists talk about consumer choice , what they are refering to is the combination of goods and services a consumer purchases.
To understand how a household will make its choices , economists look at what consumers can afford , as shown in a budget constraint and the total utility or satisfaction derived from those choices.
Utility is the term economists use to describe satisfaction or happiness a person gets from consuming a good or service.