Factors of Production and Economic Organization
Factors of Production and Economic Organization
The Role of Households and Businesses
Households are responsible for deciding how much to produce and consume. They own the factors of production and earn wages by working in companies. This income is then used to purchase goods and services or saved for future consumption. This trade-off between present and future consumption is called intertemporal substitution, and the reward for saving is called interest.
Companies organize production factors to create goods and services. They manage capital on behalf of families and hire workers. After production, companies are responsible for distribution and sales.
Legal Forms of Companies
- Cooperative Society: A group of three or more owners who contribute equal capital and are also workers.
- SA (Public Limited Company): Requires €60,102 or more in capital, divided into shares called actions. Owners (shareholders) are not required to work for the company.
- SL (Limited Liability Company): Requires €3,006 or more in capital, divided into shares.
- Limited Partnership: Requires three or more partners and €60,102 or more. There are two types of partners: general partners, who are liable for debts with their personal assets, and limited partners, who are liable only up to their investment.
Classifying Companies
Companies can be classified by ownership (public, private, or mixed), sector (primary, secondary, or tertiary), and size (micro, small, medium, or large). Large companies operating in multiple countries are called multinationals.
Company Organization
- Business and Marketing: Responsible for market analysis, advertising, and sales.
- Production: Responsible for producing goods or services.
- Finance: Responsible for managing the company’s finances.
- Human Resources: Responsible for personnel management (recruitment, payroll, etc.).
The Role of the State
The state has three branches:
- Legislative: Creates laws (exercised by Parliament).
- Judiciary: Interprets and enforces laws (exercised by judges and magistrates).
- Executive: Implements laws (exercised by the Government).
The state intervenes to promote equal opportunities and reduce social inequalities.
Government Revenue
Direct Taxes
- Personal Income Tax (IRPF): Paid by all income earners, with higher earners paying more. Companies withhold tax as an advance payment.
- Property Tax (IBI): Paid by property owners.
- Corporate Tax: Paid by companies on their profits.
- Inheritance and Gift Tax: Paid on inherited or gifted assets.
Indirect Taxes
- Value Added Tax (VAT): Paid on purchases.
- Transfer Tax and Stamp Duty: Paid on the sale of assets and legal contracts.
- Excise Duty: Added to VAT on certain goods.
Progressive taxes increase with income.
Factors of Production
- Land: Natural resources like soil, water, sun, and wind. Sustainable exploitation is crucial to prevent depletion.
- Capital: Physical objects used in production (factories, machinery, etc.). Investment increases capital, while depreciation reflects its wear and tear.
- Labor: The use of land and capital to produce goods and services. Productivity influences wages, and minimum wage laws protect low-skilled workers. Workers organize into unions to negotiate wages and conditions.
- Human Capital: Factors influencing individual productivity include natural talent, experience, and training (education as investment).
- Technology: Allows increased production with the same labor and capital. Technological advancement is driven by R&D&I (Research, Development, and Innovation).
Income from Production Factors
- Rent: Income from land, including usufruct (payment for use) and rates (payment for subsoil resources).
- Wages: Income earned by workers, ideally proportional to productivity.
- Interest and Dividends: Interest is earned on loans (capital provided to businesses). Dividends are profits distributed to shareholders (owners of company capital).