Figure 73 and Figure 74 provide two di ff erent ways to think about the

Figure 73 and figure 74 provide two di ff erent ways

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Figure 7.3 and Figure 7.4 provide two di ff erent ways to think about the structure of production in practice. In Figure 7.3 , we see that consumer goods are the lowest order good, with capital goods as increasingly higher order goods the further they are from the fi nal consumer good production. For each fi nal consumer good (goods of the fi rst order) there are multiple capital goods at each stage of production. In our example of Solomon’s Temple, we see that the 2 nd stage of production requires both fi nished timbers Higher order goods: goods that are used to produce consumption goods. Numerically, the higher the order of a good, the further it is removed from actual consumption. Goods of the 1st Order Goods of the 2nd Order Goods of the 4th Order Goods of the 3rd Order Figure 7.3, Structure of Production in the Production Process. To produce any final consumer good, there are higher order capital goods that are required, ultimately heading back to basic products such as trees (not shown) that labor can transform. The higher order the good, the further away in time the good is from the final consumer good. Land, Labor, Capital, and Entrepreneurship are all necessary to produce each stage of the production process.
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Chapter Seven: Production: Man at Work 141 and cut stones, while the 3 rd stage of production (further away from the fi nal 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 di ff erent way of thinking about the same thing. Th e 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. Th ose 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 fi nal 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. Th e 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 fi nished good or service in the way a consumer wants it. Th at fi nal stage is for goods to enter retail stores where consumers may purchase them. THE KEY POINT OF PRODUCTION IS... 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 fi nal 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 ( fi nal consumer goods). Imagine
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