I am making a document in LyX but my figures are labelled here as figure 2.1, figure 3.1, figure 3.2 etc instead of figure 1, figure 2etc. How can I fix this issue?
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As you discover ...
Document > Settings... > Modules > Number Figures by Section > Delete

This remove \numberwithin{figure}{section} in the LaTeX Preamble (as well as \usepackage{amsmath} if not needed by another command).
Note that in LaTeX preamble you can use also the chngcntr package to control the numeration of floats. See Continuous v. per-chapter/section numbering of figures, tables, and other document elements for more information.
chapterincounterwithoutof course. – Torbjørn T. Mar 10 '15 at 20:14