Key Concepts in Economics – 4 – Means, The Role of Time, Consumers’ and Producers’ Goods, Factors of Production, Structure of Production

Human action involves the application of objects found in acting man’s environment to satisfy his ends. These objects can be classified into two types

  1. those that are for all practical purposes unlimited, e.g., air, sunlight – These are called the general conditions of action. There is no need for man to economise on these. He may use these as much as he wishes to and can do so in order to achieve his ends.
  2. those that are scarce, e.g., land, water, minerals, food, etc – These are called means. As they are scarce, man has an inherent need to economise on them. Action involves application of specific quantities of means towards achieving ends.

Time as a means

As explained earlier, all action takes place in time and is directed at rendering conditions at some time in the future more satisfactory than it would be without the action. Time for man is essentially a scarce resource because applying the available time to satisfy one end means that many other ends remain unsatisfied. Therefore, time is a means to acting man and he therefore acts to economise his time. The amount of time involved in an action is certainly a factor in man’s choice of action including which ends to satisfy.

Economic Goods

Means used to satisfy wants are called goods. Such goods fall into two categories.

  1. Those that are used to directly satisfy ends – These are called consumers’ goods
  2. Those that are used to produce other goods that directly or indirectly satisfy ends – These are called producers’ goods or higher order goods

To illustrate this concept, let us use a simple example. Let’s say you are watching a cricket match at home and wish to munch on a bowl of popcorn as you do so. When your mother walks up to you to give you a bowl filled with popcorn, the popcorn is a good that directly satisfies your end – consuming popcorn. It is a consumers’ good.

However, you know perfectly well that the bowl of popcorn is not going to materialise if you were to sit in front of your television and wish that it would. Getting the bowl would require the cooperation of a number of scarce means applied for the purpose of getting you your bowl of popcorn. Your mother will need to pick up the corn, oil, salt and spices (scarce means), mix them in a suitable vessel (a scarce means) using a suitable ladle (a scarce means), switch on the stove (a scarce means) that runs on gas (a scarce means), heat the vessel with the mixture of ingredients over the flame till all the corn pops, pour it in a bowl (a scarce means) and walk from the kitchen to where you are seated so that you may enjoy the popcorn without interrupting your viewing of the cricket match. In all this, there are other scarce means such as your mother’s labour, her time, the space in the kitchen and the table on which she does her work.

All the scarce means that went into converting the ingredients into the popcorn in the bowl in your hand did not directly serve the end of consuming the popcorn but made the popcorn ready for consumption. These are called producers’ goods or higher order goods. One may walk another step back in time to the stage before all the scarce means listed above had to be made available for the purpose of being transformed into popcorn. In particular, all the factors other than your mother’s labour and her time need to be produced by the application of producers’ goods of a higher order, labour and time before they could be applied to produce the consumers’ good, the popcorn in the bowl in your hand.

If one takes sufficient steps back in time, one reaches a stage where there was nothing except the elements of nature and human labour. From this point on, the application of human labour enabled the transformation of the scarce means available in their natural state into producers’ goods of various stages till the final consumers’ good was ready for consumption. Clearly, such a process of production involves many stages each of which takes the output of previous stages as its input and produces its own output that may either be used in further stages of production or be directly consumed. This systematic organisation of the process of production is what we may call the structure of production.

The role of time in the analysis of the structure of production

It is also clear that each stage of the structure of production takes a certain amount of time. The total time taken for the production of the consumers’ good is the sum of the time taken in all the different stages of the structure of production put together. Except for the final stage, all the stages of the structure of production produce goods not for immediate consumption but for consumption in the distant future. In fact, in any advanced economy, only a small fraction of the total structure of production would be devoted to the production of consumers’ goods while the rest would be devoted to the production of producers’ goods.

Further, once we recognise the indispensability of the factor, time, in the process of production, we are also in a position to recognise that it is possible to categorise different stages of the production structure into stages closer to or remoter from the stage of consumption. The final stage is the one that leads to the output of consumers’ goods. The producers’ goods that go into this stage are called first order producers’ goods. The capital goods that go into the previous stage to produce first order producers’ goods are called second order producers’ goods and so on.

In fact, it is the recognition of the role of time and the identification of producers’ goods of different orders that gives us a systematic and coherent definition of production. Production is the process of transforming higher order producers’ goods into consumers’ goods or into lower order producers’ goods.

Further classification of producers’ goods

In the example used above, apart from time, there are two broad classes of producers’ goods that go into any stage of the production process. These are

  1. Goods that occur in nature – These may be divided into two further categories
    1. Land (which includes goods derived from land)
    2. Labour or the application of human energy
  2. Goods that need to be produced – These are called capital goods

Of these, land and labour are called the original factors of production while capital goods are called the produced factors of production. Every process of production thus involves the application three factors of production – land, labour and capital goods – to produce consumers’ goods or lower order producers’ goods.

One more factor of production

Mere possession of land, labour and capital goods does not make a production process. One needs to have a “technological idea” of how to transform the 3 primary factors of production into the desired producers’ or consumers’ good. This technological idea, which may be viewed as a “recipe”, once produced, need not be learnt again. However, its production is indispensable to the production process. In the example used above, the knowledge that corn, oil and salt need to be mixed together and then be heated over a flame to produce popcorn is the technological idea in the absence of which no amount of use of materials, labour and time may result in the desired consumers’ good. However, once one knows the recipe, it is infinitely reproducible and may be used over and over again without needing to be “produced” each time.

Summary

A systematic analysis of means from a perspective of analysing human action leads us to an understanding of the classification of means in terms of their direct and indirect use in the achievement of human ends, i.e., as consumers’ goods and producers’ goods. A further analysis of the process of production leads us to realise that a process of production involves many stages each of which transforms producers’ goods into consumers’ goods or other producers’ goods closer to the stage of consumption. The sum total of all the stages of production is called the structure of production. The role of time in the process of human action also enables us to classify different stages as stages closer to or remoter from the stage of consumption. This enables us to categorise producers’ goods into different orders based on how close to or remote from the stage of production of consumers’ goods they are employed. This further enables us to give a clear and coherent definition of the term production. A further careful analysis of the category producers’ goods leads us to the identification of 3 factors of production that go into any process of production – land, labour and capital goods. The first two are together called the original factors of production and the third, the produced factors of production. All these factors are integrated by the technological idea or the recipe that enables the transformation of the three primary factors of production into the desired producers’ or consumers’ goods.

Key Concepts in Economics – 4 – Means, The Role of Time, Consumers’ and Producers’ Goods, Factors of Production, Structure of Production
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