Factors of Production, Economic Agents, and Systems

Posted on Feb 8, 2025 in Economy

Factors of Production

Production factors (inputs) are the set of resources that can be used to produce goods and services (outputs). Traditionally, these resources are classified into three categories: labor, land, and capital (machinery, computers, vehicles, raw materials, etc.).

The capital employed in production can be classified into fixed capital and working capital.

  • Fixed Capital: All the elements of a company that are in it for a long time (machinery, computer equipment, etc.).
  • Working Capital: Elements with a duration of less than a year (raw materials, energy consumed, etc.).

Fixed capital will lose value with use, through the passage of time and technological progress. This decrease in value is called depreciation. Depreciation is an expense for the company that is collected through amortization.

Economic Agents

  • Households: (Consumer economic unit) Economic activity addresses the economic problem by administering an income to purchase goods and services, wages, profits, interest, and other income rentals.
  • Companies: Classified according to activity (industrial, trade, services) and legal form (sole trader, partnerships). Businesses can be classified judicially: the first refers to the responsibility of Heritage (limited and unlimited liability), requirements for admission (partnerships, capitalist societies). Legal classification of companies includes: partnership, limited partnership, anonymous, limited, and cooperative.
  • The Public Sector: Tries to solve the economic problem. Activities carried out include: public works and infrastructure, purchase of goods and services needed for developing its functions, collecting taxes to finance its expenditures and investments, and managing the country’s economic policy.

Economic Sectors

Primary, secondary, tertiary.

Economic Systems

An economic system is a mechanism that is used to organize economic activity and resolve the economic problems of the allocation of resources. Each economic system answers these questions: What goods and services should be produced? How? For whom?

Capitalist System

The capitalist system answers these questions as follows: Businesses produce goods and services that consumers demand in the market. The capitalist system operates under the principle of freedom of competition. Goods are for those who have sufficient income to enable them to purchase goods.

Features:

  • Ownership of the means of production is private.
  • Freedom of choice.
  • The state does not intervene in economic activity.
  • The price system is variable.

Socialist System

In the socialist system, the three questions are the exclusive decision of the State.

Features:

  • Property is public.
  • The entrepreneur becomes an official.
  • The system focuses on the satisfaction of collective needs.
  • There is no freedom of action for traders.
  • The state sets prices and wages.

Mixed Economic System

The three questions are answered thus: The goods that consumers demand are produced by private companies and the public sector, for those who have enough income to pay the prices of the products.

Features:

  • Companies and means of production are almost always private property, although they may be public.
  • There is freedom of choice for agents to meet economic objectives.
  • Most goods and services are determined through the laws of supply and demand; the remaining minority are set by the State.