ECON 1a FACTORS OF PRODUCTION

I reserve the right to be wrong.

So, economics is concerned with people's material production and exchange with each other. 'What the floop does that mean, Matt?' I hear you ask!

You create in the course of your life. Creation, which economists call production, takes in manufacture, harvesting crops, writing novels, and so on...

You sell (exchange for money) these things you have produced. As they were produced, they are called products. Products can be physical, tangible, hold-in-your-hand goods, or non-physical, intangible services. Both are produced. Both are products.

Phones, cars and clothes are goods. Haircuts, massages and investment advice are services. A book is a tangible good, but the novel inside is an intangible service. Same with a CD/DVD/Blu-Ray. Overall, they are all still products.

'But Matt, how do economists explain the making of products?'



LAND, LABOUR, AND CAPITAL

Products are produced. We arrive at them through production. But that production needs inputs in order to output the products. These inputs are called the factors of production, and they are the land we live and work on, the labour of people, and the tools and other artificial goods we use, such as a lathe in a machine shop.

You can also see all of these factors as forms of capital;



NATURAL CAPITAL

Instead of Land, just see everything provided by nature in one neat category. thus including animals, plants, ores, clean air, drinking water, biodiversity, et cetera.



HUMAN CAPITAL

The bodies and minds of people; so their mechanical abilities plus their learned skills , such as advanced mathematics, or carpentry, or smithing, et cetera.



PRODUCED/PHYSICAL CAPITAL

As Capital in the Land, Labour, Capital troika. Stuff that has been made for use in the production process, such as computers, industrial machinery, vehicles, hard hats, et cetera.



Production, taking in these three factors, churns out almost everything we exchange with each other. You are always free to find some gap in the economy; some demand for a product that doesn't yet exist, and stick your oar in to produce and provide that product. Production has existed since time immemorial, but has become an ever more capital-intensive process. What do I mean by that? I mean that the importance of capital/physical capital in every unit of production is increasing relative to the other two factors.



This happens because employers always seek to make their enterprises less labour-intensive. The downside of this is that many workers become less necessary and lose their jobs. On the other hand, those who don't, or who learn the new skills to fit with the increase in capital intensity win big, because their job security, absent a glut of people with the same qualifications, actually increases, and working hours can go down even as net wages go up, as happened in the late 19th century.



Economic growth is partly a by-product of increased productivity resulting from this increasing capital intensity. In fact another word for a society that puts ever more capital into the production process could be Capitalism. But that's for another day.



Money is notably absent from here, but that's because money doesn't produce anything. It is only exchanged for a product after the production process, or paid to a person as wages in exchange for their effort in the production process, thus invalidating money as a factor of production.



On the next Ecomony Blogtime;

Matt describes Exchange, or Trade, without which there is no economy!