Hi. Welcome to Economics. This is Kate. The title of this tutorial is factor markets. As always, my key terms will be in red, and my examples are in green. At the end of this tutorial, you'll be able to explain the difference between final and intermediate goods. I'll be giving you some examples to help show you the difference.
You'll be able to identify the factors of production. We'll be comparing capital versus labor intensive goods. We'll see substitutes and compliments in production and see how they're different. And finally, you'll understand what's meant by economies and dis-economies of scale.
OK, so there's a distinction between final and intermediate goods. Final goods are simply defined as products ultimately produced, whereas intermediate goods are defined as products or services used to generate other goods. So I think the examples actually help a little bit better than even the definitions.
If I buy a new car, that's a final good. There's a final selling price of it. But the car company had to purchase a lot of things to put into that car. Anything that they purchase that's included in the final selling price, like the tires that they decide to put on it, are going to be an intermediate good.
Now if I go out and buy tires for my 3-year-old car because it needs new tires and I go to Goodyear, those would be a final good. But the tires that the car company uses to make the car, those are an intermediate good.
A new house is a final good. Just like our car example, anything that the contractor buys to put into that new house will be included in the final selling price. And so the windows that he puts in the new house are an intermediate good.
Finally, a painting that maybe you buy to hang up on the wall in your home is the final good, but the paint and the paint brushes that the artist purchases to make the painting are an intermediate good. Hopefully that makes sense for you.
OK, so without the factors of production, businesses couldn't produce anything, so let's talk about them now. Factors of production are resources defined as land, labor, and capital that are necessary to produce output. The first one is land. Land is a factor of production that occurs naturally in the form of real estate or organic assets. This is pretty straightforward.
Land itself is obviously included under land. Most companies have to buy some amount of land to have a place to do business. But land also includes anything that comes from the land. So any animals on the land, fertile soil, minerals, timber, and water. And you'll notice I put natural resources there, and that's another key term.
Natural resources are organic material found in its natural habitat. Basically anything that's not man-made. The next category in factors of production is labor. Labor is a human service that contributes to the creation or distribution of goods or services. There's some examples of occupations, things that people do for labor, but again, very straightforward.
The idea here is that our entire workforce, whether it's doctors and nurses, teachers, hairstylist, cashiers-- anyone producing either a final good or a service is considered labor. Without labor, not really much of anything could get produced.
And then we have capital. Capital or material assets, either the form of money or machinery used as a factor of production. I like to think of capital as anything that's already been produced, but will now be used to help produce other things. So like buildings, computers, roads.
I'm sitting here generating this tutorial right now, so I am labor. But without my capital, without my computer that I'm using at this very moment, I couldn't be able-- I would not be able to produce this tutorial. So that's my capital for right now today.
And that brings us to technology. I want to talk about technology for a little bit. Technology is specialized production techniques. Technology is a wonderful, wonderful word in economics. What is going to allow companies to do is more efficiently use their other factors of production.
So a classic example that we'll talk about for a minute here is the invention of the Cotton Gin. I'm sure a lot of you learned about Eli Whitney and the Cotton Gin back in a history class at some point. Prior to the Cotton Gin, harvesting cotton was incredibly labor intensive. That was the biggest factor of production being used.
Well this technology not only allowed them to cut back on the labor intensity, but it hugely increased the amount of cotton that could be harvested. And so even though there was an upfront cost in purchasing this capital or this technology, the cost savings was quickly realized because of how much more they could produce and how much less intense the labor needed to be so it helped them to utilize the other factors of production. That's why we like technology so much.
OK, so now I want to get into either complementary versus substitute resources. How do we look at resources? Do they go together? You know, do the factors of production work together, or are they substituted for one another? In all honesty, it just depends on how we look at it. Let's look at it first as complementary.
So if we look at it this way, we're saying adding capital makes our labor more productive. So we can have all the buildings and machines that we want, but they're not going to be very useful in most cases without people who know how to operate them or utilize the space.
And so if we say that, it means that the two go together and so they're complementary. In an example here I'm using a sandwich shop. Let's say you own a sandwich shop and people are lining up like crazy to eat your sandwiches. And in fact, you can't even meet the demand at all. So what do you do?
Well certainly, in the short run you could hire more workers. But if those workers are getting in one another's way because you don't have enough capital then they're not going to be very efficient. So if you purchase a new grill, that's capital. That's going to make your workers more efficient, your labor. So capital and labor would work together.
We could also look at resources as being substitutes of one another. If labor becomes very expensive, as minimum wage goes up, we tend to see this happen. Firms can, in the long run especially, adopt labor saving technologies. And they can start to substitute capital for labor.
Assembly lines, you know, automating assembly lines is an example of substituting capital for labor. But on the other end of it, if capital is too expensive for them right now, firms can certainly use labor intensive techniques to produce.
The idea is that most things can be produced in different ways. With a labor intensive example, maybe a grocery store decides that for them it makes more sense to hire a lot of cashiers to check people out at their grocery store. Whereas, I know in my area, some are moving towards a more capital intensive approach and adopting self checkout technology.
I think the hope is to replace some of the labor with the self checkout lanes, the capital. The bottom line, again, is that the profit maximizing firm will choose whatever minimizes costs for them in their specific situation.
One final thing we need to consider is that, sure, you know, you can always look to minimize cost, but there can be an attachment to your labor force. Let's use the example of a really seasoned management team. Sure, you might be looking at it if you're the owner of the company saying wow, I'm really paying these people high salaries. They've been here a long time. Are they really worth the money?
I could replace them with some younger people who won't cost me as much money. I could replace some of this with some capital and do away with all these, you know, all this labor. But what if a crisis were to occur in your company? Who would you trust to help the company recover or turnaround? There can definitely be an attachment here, and there can be a benefit in holding on to that even if it's not necessarily minimizing cost right now. It could in the long run.
OK, so in the short run, as I've kind of already talked about a little bit, factors of production or land, labor, and capital can definitely affect production. You can hire more or less labor depending on how your company is doing. You can utilize all of your land. You can utilize all of your machines, your capital or not if it's not doing so well.
In the long run, more options open-- more options come along your way. You can grow your company. You can expand. You can raise more capital to adopt new production techniques. That's where you can find more technology and things like that. But either way, factors of production are going to affect you in the short run and in the long run, just in slightly different ways.
Finally, a concept I want to go over is the idea of economies of scale. Since we're just talking about the long run, this is a long run issue. Companies very often, what they are doing in the short run is just trying to do the best that they can with what they have. But in the long run, like I said, they can grow their company. So how big do they want to get?
Many companies find that as they increase the size of their company, they actually start to lower their average costs because they're spreading out any upfront or fixed cost. If that's the case, we call this economies of scale, or sometimes called increasing returns to scale. Basically how big you're getting. That's what scale means.
But other companies have found that as they grow, it actually leads to inefficiency, at least to some waste, and their overall cost structure begins to rise. And this is where you have decreasing returns to scale, or what we call dis economies of scale. And here, it would not be economical to grow your company in the long run any further.
So what did we go over today? We went over the difference between final and intermediate goods. We looked at factors of production-- land, labor, and capital. We talked about the difference between labor and capital intensive goods. And finally, I just ended with a discussion on what economies of scale are. Thanks so much for listening. Have a wonderful day.