No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seven: Production: Man at Work 157 and cut stones, while the 3 rd stage of production (further away from the final consumer good of the Temple) had raw cut logs and stones. Further back from these were saws and axes used in the cutting of saw logs. Figure 7.4 illustrates a slightly different way of thinking about the same thing. The most basic of materials are the raw commodities that come from land; they are usually the highest order good because they are the furthest away from being a consumer good. Those commodities are acted upon by manufacturers, who add both value and time to the production process by shaping the raw commodities into something closer to a final consumer’s good. Perhaps iron ore is processed in steel, and subsequently fashioned into a fender that you will use to replace the one you dented. The wholesale trade will both (1) take more time, and (2) provide additional value by grouping the assets in a way that makes it easier to ultimately get in the hands of a consumer. Recall from our discussion of the middleman in the last chapter that every stage is involved in production—they are part of an overall production process that ultimately delivers a finished good or service in the way a consumer wants it. That final stage is for goods to enter retail stores where consumers may purchase them. THE KEY POINTS OF PRODUCTION ARE... 1. requires the factors of production (land, labor, capital, and entrepreneurship), 2. takes time, and 3. adds value to the product. DERIVED FACTOR DEMAND As we see the interrelationships between various levels of goods and final consumer products, we begin to see that the value we place on higher order goods is inextricably linked to the value we place on the goods of the 1 st order (final consumer goods). Imagine a consumer good with only one higher order good; for arguments sake let’s say that a type of apple is the final consumer good and the higher order good is the corresponding apple tree. This particular apple is “mushy,” and prone to spoil quickly. Now assume researchers have come up with a new tree that produces very crisp, sweet apples that don’t spoil, such that the demand for the original mushy apple drops dramatically. What Figure 7.4, Structure of Production. Another way to consider the structure of production is by viewing the highest order of goods as the raw commodities, which are taken as inputs by manufacturers to create finished goods. Those goods are usually sold or distributed by wholesalers to retailers, who sell the final consumer’s goods. Note that each stage requires some combination of all the factors of production: land, labor, capital, and entrepreneurship. Also note that each stage of production both adds more time to the production process and also increases the value of the product. $ Time Land, Labor, Capital,and Entrepreneurship acting in... Raw Materials Manufactured Goods Wholesale Retail Trade