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Fundamentals of Economic Development and Basic Macroeconomics >

Goods and the Factors of Production

Types of Goods

There are two main types of goods: free goods and economic goods.

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Free goods are those that can be obtained without any cost, which is available in abundance and does not require payment. For example: air and sunlight.

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On the other hand, economic goods are scarce or limited in supply and, therefore, have a price associated with them. For example: food and clothes. Note that the more limited the supply of a certain economic good, the more valuable it becomes, leading to a higher price.

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Goods can also be classified based on their stage in the production process into final goods and intermediate goods. Final goods are products that are ready for consumption and do not require further processing.

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In contrast, intermediate goods, also known as "semi-finished products," are used in the production of other goods that will eventually become final products. It’s important to note that intermediate goods are components or parts of the final product. For example, if you eat a mango directly, it is considered a final good. However, if you use the mango as an ingredient in making mango ice cream, it is considered an intermediate good.

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Factors of Production

In economics, the factors of production—land (natural resources), labor, capital, and entrepreneurship—are fundamental concepts in economics.

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  • Land includes all natural resources, like the land itself, as well as the rocks, water, plants, and animals that live on or near the surface. Examples: Agricultural fields used for farming, forests for timber, or mineral deposits like coal and oil.

 

  • Labor is the work that people do to make things, like the work that professionals, employees, and skilled workers do. Examples: factory workers who put together goods, doctors who treat patients, and engineers who plan projects.

 

  • Capital includes man-made goods used in the production process or facilitate business operations. Examples: invested money for making business, machinery, and work equipment used in manufacturing products, computers employed in a tech company, and trucks utilized in farming.

 

  • Entrepreneurship involves the skills and knowledge needed to plan, organize, and manage production, taking on the risks of starting and running a business. Example: a business owner who starts a new company, a manager who manages operations, or a product creator who comes up with new goods.

References

Heilbroner, R. L. (1999). The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (7th ed.). Simon & Schuster.

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Mankiw, N. G. (2013). Macroeconomics (8th ed.). Worth Publishers.

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Orejana, P., & Teves, A. (2014). Introduction to economics, land reform, taxation, and cooperatives. MSU-IIT, Iligan City, Philippines.

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Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell.

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Harberger, A. C. (2024). Microeconomics. Econlib. https://www.econlib.org/library/Enc/Microeconomics.html

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Varian, H. R. (2016). Microeconomics. In The New Palgrave Dictionary of Economics (pp. 1–5). Palgrave Macmillan UK. https://doi.org/10.1057/978-1-349-95121-5_1212-1

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