Understanding Production Factors and Economic Systems

Posted on Mar 3, 2025 in Economy

Factors of Production

Factors of production are classified into three categories:

  • Land (Nature): Resources that nature provides.
  • Labor: Physical and intellectual faculties of human beings involved in the production process. Labor is a basic production process.
  • Capital (Physical or Real): Includes buildings, factories, machinery, equipment, and other means used in the production process.
    • Human Capital: Education and vocational training that increase work performance.
    • Financial Capital: Funds needed to purchase physical capital or financial assets.

Types of Property

  • By Character:
    • Free: Unlimited or very abundant.
    • Economic: Scarce and cost money.
  • By Materiality:
    • Goods: Materials (e.g., table, computer).
    • Services: Activities (e.g., education, security).
  • By Nature:
    • Capital: Do not directly satisfy a need.
    • Consumption: Directly meet needs.
      • Durable: Used more than once.
      • Non-durable: Used only once.
  • By Function:
    • Intermediate: Needs further conversion before use (e.g., steel, screw).
    • Final: Finished, ready for use (e.g., toy car).
  • By Consumption:
    • Private: If one person uses it, another cannot use it at the same time.
    • Public: Can be used simultaneously by several people.

Economic Growth

Economic growth increases the amount of production. It requires increasing production factors (land, labor, capital) and upgrading technologies.

Economic Sectors

A homogeneous set of activities used to satisfy a need.

Barter

Exchange of one good or service for another (without using money). Disadvantages:

  • Coincidence of needs.
  • Indivisibility of some assets.

Money

Money facilitates exchange and helps the economy to function efficiently.

Types of Businesses

  1. By Activity:
    • Industrial: Processing of raw materials into goods.
    • Commercial: Buy and sell finished products.
    • Service: Performs activities, not goods.
  2. By Legal Nature:
    • Individual Enterprise: Belongs to and is directed by an individual; unlimited liability.
    • Partnership: Belongs to 2 or more partners who contribute labor and capital; unlimited liability.
    • Limited Liability Company: Belongs to 1 or more partners; unlimited liability.
    • Corporation: Belongs to 1 or more members; ownership is divided into shares; limited liability.
    • Cooperative Society: Non-commercial property; does not intend to make a profit; created to meet common needs for services.

Business Financing

Resource uptake.

  • Internal Financing: Financial resources that are not returned. They belong to the firm and do not come from financial markets. Types:
    • Capital: Resources from partners; shares.
    • Self-Financing:
      • Used proceeds to invest in expanding or modernizing the business.
      • Maintains productive capacity.
      • Increases productive capacity.
      • Financial Deals: Dividends and reserves.
  • External Financing: Resources obtained that must be returned. Types:
    • Financial Institutions: Banks, savings banks, etc.
      • Loan: Borrow money and undertake to repay it plus interest.
      • Credit: The company has access to a certain amount of money that it can withdraw as needed, paying interest only on the amount actually used.
    • Obligations/Bonds: When a company requests a loan, it undertakes to repay the agreed amount plus interest.
    • Commercial Credit: Awarded by the company’s suppliers.

Public Sector

Consists of a set of public bodies and departments with three levels of government: state administration, regional administration, and local administration.

Capitalism or Market Economy

An economic system in which private individuals and business firms carry out the production and exchange of goods and services through transactions involving prices and markets.

Disadvantages: Inequality, wage disparities, crises, market failures, and manipulation through advertising.

Communism or Centralized Economy

A mode of economic organization in which economic functions are performed by the state.

Mixed Economy

Its operation is mainly based on the price system, but the state intervenes to regulate economic activity.