EDEN IAS

ECONOMIC PRODUCTION

ECONOMIC PRODUCTION

ECONOMIC PRODUCTIONIntroduction of Economic Production:

It refers to a physical process/activity carried out under the control and management of an institutional Unit that uses inputs of Labour in Economic Production, Capital, other goods and services to produced output of other goods and services.

Who are the producers?

Producers or institutional units are economic entities capable in their own right of:

  • Owning asset– land, machinery & equipment, bank deposits, bonds, shares etc.
  • Incurring Liabilities- borrowing, raising loans etc.
  • Engaging in economic activities- production, distribution, consumption, capital formation etc.

Types of producers (economic entities)- Households, private enterprises, government and external sector.

FACTORS OF ECONOMIC PRODUCTION (FOP)

FOP’s are primary inputs in production process. There are total 4 factors of production:

  • Land
  • Labour
  • Capital
  • Entrepreneur

The FOP’s get factor incomes or factor payments, which depend on the demand of each factors of production. For e.g. Land gets rent, labour receives wages, capital earns interest, and the entrepreneur derives profit for their contribution to the production process.

The demand for FOP’s calls a derive demand and depends on demand for end (final) goods.

FINAL GOODS OF ECONOMIC PRODUCTION

  • Goods that produce can be put to two final uses:
  1. Consumption- these were consumer goods.
  2. Capital formation- these set aside for further production- and call capital goods.
  • They are FINAL because they will not undergo any further transformation at the hands of any producer.
                                                       CONSUMER GOODS

·       Consumer goods were those that consuming by the ultimate users for the direct satisfaction of individual or collective needs.

·       They are of 3 types-

1.     Durable consumer goods- that do not exhaust immediately on consumption and have a life of more than a year. For e.g. Fridge, car, computers, TV sets etc.

2.     Non-Durable Consumer Goods

o   They are products that consumers purchase with the plan to use for a short period of time.

o   They may be immediately consuming, for e.g. perishables like food and drinks, or may have a life of less than a year for e.g. Deodorant, toothpaste, clothes etc.

3.     Services- For e.g. Education, Healthcare, Banking, Transportation etc.

·       The final consumption of these goods primarily run by Household and Government. Private sector mostly produces and sells consumer goods to these two groups, and their own consumption might be negligible.

SOME CAPITAL GOODS OF ECONOMIC PRODUCTION

                                                       CAPITAL GOODS

·       Capital formation refers to the part of current year production that is not consumed but set aside for future production i.e., it is excess of production over consumption and enhances productive capacity of an economy.

·       Goods set aside for capital formation are called capital goods. The part of final output that comprise capital goods is also called gross investment of an economy.

·       Characteristics of Capital Goods

o   They are durable goods i.e. do not get exhausted immediately on consumption.

o   They are used in further production process as “production enablers” e.g. Plant and machinery, buildings, bridges, railway, aircrafts etc.

o   However, they do not undergo further transformation during production process (thus, are final goods).

UNDERSTANDING THE DIFFERENCE BETWEEN CONSUMER, CAPITAL AND INTERMEDIATE GOODS
  • Consumer Good Vs. Capital Good
  • If a car is purchased by an individual for personal use, it will act as a consumer Good.
  • However, if the car is purchased by a car rental company in the process of providing transport services for the market (and not for own use for e.g. Uber Cab services), it will serve as a Capital Good. The car is a durable good and does not get transformed in the production of services, thus, cannot be termed as intermediate good.
  • Consumer Good Vs. Intermediate Good
  • A product may be either a consumer or an intermediate good, depending on who buys it.
  • If an individual buys salt and takes it home for everyone in the household to consume it, it is a consumer Good.
  • However, when bakers buy salt to add their products, it is an intermediate good. It is not the end of the journey for the salt. After adding salt to bread, the baker then sells that bread. In the process the salt gets completely transformed and becomes a part of the bread.

CIRCULAR FLOW OF INCOME

ECONOMIC PRODUCTION..

Circular Flow of income presents how money, goods and services move between sectors in an economic system. The flows of money between the sectors are also tracked to measure a country’s national income or GDP.

FACTOR PAYMENT vs TRANSFER PAYMENT
BASIS FACTOR INCOME TRANSFER INCOME
Meaning Payment received in exchange for rendering productive service is factor income. it is the income received without providing any service (or good) in return.
Components It comprises rent (for land), wages (for labour), interest (for capital) and profit (for entrepreneurship). It comprises gifts, donations, scholarships etc.
Type of income It is an earned income (earning capacity) It is an unearned income (receipt concept)
Quid pro Quo It is a bilateral payment. It involves quid pro quo. It is a unilateral payment. It doesn’t involve quid pro quo.
National income accounting It is included in national income It is not included in national income

SOURCES- NCERT, THE HINDU, Wikipedia