Economic Goods and Free Goods
The term "goods" is frequently used in a general sense to include services, as long as it does not cause confusion or ambiguity. It is used in this wide sense in this section. Goods are economic if scarce resources have to be used to obtain or modify them so that they are of use, i.e. have utility, for people. They are free if they can be enjoyed or used without any sacrifice of resources. A few minutes' reflection will probably convince you that most goods are economic in the sense just outlined. The air we breathe under normal conditions is free, but not when it has to be purified or kept at a constant and bearable pressure in an airliner. Rainwater, when it falls in the open on growing crops, is free, but not when it has to be carried to the crops along irrigation channels or purified to make it safe for humans to drink. Free goods are indeed very precious and people are becoming increasingly aware of the costs of destroying them by their activities, e.g. by polluting the air in the areas where we live.
factors of production
Since there are very few free goods most have to be modified in some way before they become capable of satisfying a human want. The process of want satisfaction can also be termed "the creation of utility or usefulness"; it is also what we understand by "production". In its widest economic sense, production includes any human effort directed towards the satisfaction of people's wants. It can be as simple as picking berries, busking to entertain a theatre queue or washing clothes in a stream, or as involved as manufacturing a jet airliner or performing open heart surgery. Production is simple when it involves the use of very few scarce resources, but much more involved and complex when it involves a long chain of interrelated activities and a wide range of resources.
We now need to examine the general term "resources", or "economic resources", more closely. The resources employed in the processes of production are usually called the factors of production and, for simplicity, these can be grouped into a few simple classifications. Economists usually identify the following production factors.
Land
This is used in two senses:
(a) the space occupied to carry out any production process, e.g. space for a factory or office
(b) the basic resources within land, sea or air which can be extracted for productive use, e.g. metal ores, coal and oil.
Labour
Any mental or physical effort used in a production process. Some economists see labour as the ultimate production factor since nothing happens without the intervention of labour. Even the most advanced computer owes its powers ultimately to somehuman programmer or group of programmers.
Capital
This is also used in several senses, and again we can identify two main categories:
(a) Real capital consists of the tools, equipment and human skills employed in production. It can be either physical capital, e.g. factory buildings, machines or equipment, or human capital – the accumulated skill, knowledge and experience without which physical capital cannot achieve its full productive potential.
(b) Financial capital is the fund of money which, in a modern society, is usually needed to acquire and develop real capital, both physical and human.Notice how closely related all the production factors are.
Most production requires some combination of all the factors. Only labour can function purely on its own, if we ignore the need for space. A singer or storyteller can entertain with voice alone, but will usually give more pleasure with the aid of a musical instrument and is likely to benefit from earlier investment in some kind of training. The hairdresser requires at least a pair of scissors! Much of economic history is the story of people's success in increasing the quantity and quality of production through the accumulation of human capital and the development of technically advanced physical capital. I can dig a small hole in the ground with my bare hands, but creating the Channel Tunnel between Britain and France has required a vast amount of very advanced physical capital together with a great deal of human skill and knowledge. Modern firms depend for their survival and success on both their physical and their human resources. While some may feel that the current trend to replace the business term "personnel management" by "human resource management" is in some degree dehumanising, others welcome it as a sign that firms are recognising the importance of employee skills as human capital.
0 Comments