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 Market Transporting Harvesting

Production Sea Oil drilling Storage Petroleum Refilling Car Transporting

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 Primary producers 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 Secondary producers 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 Tertiary producers 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 Example: Oil drilling 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  Interest rate  Interest 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 resources bear risk of job losing

4 Factors of production Difference Entrepreneur Labour earn profits bear risk of business losses Labour earn wages no need to bear the risks of loss, protected by law (is it always true?)

Production resources in HK Natural Strength: Harbour, natural shelter Geographical location Weakness: farmland mine 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-working well-educated high working population willingness to start business Weakness high wages labour with low occupational mobility

The relationship between the factors of production, production & output Factors of production (Input) Goods & services Consumer goods & producer goods Private goods & public goods Land Capital Labour Entrepreneurship Types of production Primary production Secondary production Tertiary production