Economics

Chapter 3

Production

Production

Activity that turn resources or input into goods or services.

A process through which resources are transformed into goods or services.

From input to output To use resources to create value

Production

Land Plowing Seedling

Watering

HarvestingTransportingMarket

Production

Sea Oil drilling Storage

TransportingCar Petroleum Refilling

Classification of output

By form: Goods

Tangible / visble touchable be used for consumption or production e.g. T-shirt, hamburger, house

Services Intangible / invisible activities directly satisfy wants help with production e.g. bank-saving, insurance, medical check

Classification of output

By use: Consumer goods

directly satisfy human wants e.g. car, computer, tennis racket, TV at home

Producer goods capital goods goods are used to

produce other goods help provide other services

e.g. bus, ATM, Roadshow TV on the bus

Classification of output By rivalry and excludability

Private goods rival, same unit can be used to serve only one person or

household excludable, to prevent others from enjoying it e.g. T-shirt (can’t be wear by more than one person at a

time) Public goods

non-rival can serve different consumers at the same time doesn’t matter how many consumers

non-excludable can’t / difficult to prevent others from enjoying it

e.g. National defense, traffic lights, postbox

Private Goods vs. Public Goods

Typical example Book:

Private consumed by one person only

rival and excludable Knowledge:

Public can be shared with all people

non-rival and non-excludable

Private Goods vs. Public Goods

Internet Public: can be used by many users at the same time Private: net congestion, rivalry in consumption

Fireworks on National Day Public: everyone can enjoy the show Private: limited space, rivalry in occupying a place for enjoying

the show

Mobile network Public: can serve many customers Private: congestion during typhoon day, rivalry in consumption Private: a number can serve only one customer, excludable

Types of production

Primary production direct use of natural resources extract from nature output: food and raw materials e.g. farming, fishing, husbandry, mining

Primary producers people who engage in primary production e.g. farmer, fisherman, husbandman, miner

Types of production

Secondary production process turning raw materials to goods value-added output: finished / semi-finished goods e.g. manufacturing, construction, supply of

electricity Secondary producers

people who engage in secondary production e.g. factory workers, manufacturer

Types of production

Tertiary production all kinds of services value-added e.g. education, transport, banks, retailing

Tertiary producers people who engage in tertiary production e.g. teachers, bus-drivers, bank managers,

salesperson

Types of production

Relationship Interrelated Interdependent Output of one type = Input of another type

Types of production Example: Fish

Primary production: fish (fisherman catches fish from the sea, from nature)

Secondary production: a dish of steamed fish (chef cooks the fish, make raw fish into seasoned fish)

Tertiary production: serve the dish of fish the table (waiter takes the dish to customer, service provided)

Example: Oil drilling Tertiary production: fund raising (banker finds potential investors

to invest) Secondary production: build oil driller (making of captial goods) Primary production: petroleum drilling (extract raw material from

the nature)

4 Factors of production

Land natural resources fixed in supply: land / petroleum / mines change in supply: sunshine / rainfall / wood decrease: mining / lumbering increase: planting / volcano eruption no production cost, but opportunity cost of

different usage

4 Factors of production

Capital man-made resources tools: machinery / infrastructure / equipment production cost interest involved: capital owner earn interest

4 Factors of production

Capital Capital formation

creation of capital goods a kind of investment increase productivity, future income and consumption interest rate is the cost exchange of present consumption to future

consumption

4 Factors of production

Capital Mechanism

Interest rate

Interest

Cost (investment means give up more interest returns on loans)

Less investment

Less capital formation

4 Factors of production

Capital - Depreciation and Capital accumulation Depreciation (also named as capital consumption)

wear and tear obsolescence

Capital accumulation Rate of capital formation > depreciation

Depreciation and Capital accumulation are very important items to be listed in accounting balance sheet.

4 Factors of production

Labour human resources provide man-power mental or physical efforts earn wages

4 Factors of production

Entrepreneurship human resources founders or directors of entrepreneur / firm decision-makers risk-bearers, losses because of wrong investment /

decision investors, aim at profit making

4 Factors of production

Similarity Both Entrepreneur and Labour are

human resourcesbear risk of job losing

4 Factors of production

Difference Entrepreneur

earn profitsbear risk of business losses

Labourearn wagesno need to bear the risks of loss, protected by

law (is it always true?)

Production resources in HK

Natural Strength:

Harbour, natural shelterGeographical location

Weakness: farmlandmine fishing port

Production resources in HK

Man-made Strength:

infrastructure, e.g. airport, transportation network

finance market legal system

Weakness: factories, because of high cost

Production resources in HK

Human Strength

hard-workingwell-educatedhigh working populationwillingness to start business

Weaknesshigh wages labour with low occupational mobility

Factors of production (Input)•Land•Capital•Labour•Entrepreneurship

The relationship between the factors of The relationship between the factors of production, production & outputproduction, production & output

Types of production•Primary production•Secondary production•Tertiary production

Output

• Goods & services• Consumer goods & producer goods

• Private goods & public goods