Economic Circuit and Factors of Production
Economic Circuit
The economic circuit describes the flow of resources and money within an economy. Families provide labor (land, capital) and purchase goods and services from companies. Companies pay salaries to families for their labor and charge for goods and services. Both families and companies pay taxes to the state, which in turn provides public services and infrastructure. Families may deposit savings in banks, which then lend to companies for investment.
Economic Units
Economic units (families, businesses, and the state) engage in the production and consumption of goods and services to satisfy human needs. Families are units of consumption and own productive resources (labor and capital) required by companies. Companies are economic agents that produce goods and services, obtaining necessary factors of production from families in exchange for payment (rent, salaries, etc.).
Business Classification
By Activity
- Primary: Companies engaged in extracting raw materials from nature (e.g., mining, agriculture).
- Secondary: Companies that transform raw materials into different assets (e.g., manufacturing industries).
- Tertiary: Companies that provide services. These can be further classified into:
- Service: Companies providing benefits through human actions without producing material goods.
- Commercial: Companies buying and selling goods in the same state as purchased.
- Mixed: Companies providing a service and selling goods.
By Ownership of Capital
- Private: Capital is provided solely by individuals without state intervention.
- Public: Capital is provided by the state (majority or minority participation).
- Mixed: Capital is provided by both the state and private individuals.
- Nationalized: Companies originally privately owned but later taken over by the state.
- Privatized: Publicly owned goods and services transferred to the private sector.
By Origin of Capital
- National: Capital contributed by individuals or entities operating within the country.
- Foreign: Capital provided by companies or individuals from other countries.
- Multinational: Companies operating in two or more countries with significant economic and financial capacity.
By Size
- Small: Individually or personally owned companies with a small staff.
- Medium: Companies with larger sales and production volumes.
- Large: Companies with high production volumes, often with branches and international trade operations.
Role of the State
The state is a crucial economic agent, offering and demanding goods and services. It collects taxes and uses the revenue for public works and services. There are three types of taxes:
- Taxes: Required payments from inhabitants without direct return, used for security, health, and education.
- Fees: Payments for specific public services and works.
- Special Contributions: Payments made by beneficiaries of specific works for a limited period.
Factors of Production
- Land/Natural Resources: Raw materials provided by nature, essential for production (e.g., farmland, water resources).
- Labor: Physical and intellectual activity contributing to the production process.
- Capital: Resources used in production, including physical capital (machinery, buildings), circulating capital (tools, materials), monetary capital (funds), and human capital (knowledge and skills).
- Entrepreneurship: Coordinating, organizing, planning, and controlling economic activity, including decision-making on production and technology.
- Technology: Scientific knowledge, methods, and procedures used in production.
Population
Population represents the workforce and consumers within an economy. It’s categorized as:
- Active: Individuals capable of working (typically aged 16-60/65). This includes:
- Employed: Actively working.
- Underemployed: Working less than normal hours.
- Unemployed: Seeking employment but unable to find it.
- Passive: Individuals not considered part of the active population (e.g., retirees, students, homemakers).
Remuneration of Productive Factors
Each factor of production receives a price:
- Land: Rent
- State Services: Taxes
- Labor: Salary, Benefits (for business owners)
- Capital: Interest