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Figure 7.3and Figure 7.4provide two different 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 goodsas increasingly higher order goodsthe further they are from the finalconsumer goodproduction. For each final consumer good (goods of the first order) there are multiple capital goods at each stage of production. In our example of Solomon’s Temple, we see that the 2ndstage of production requires both finished 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 OrderGoods of the 2nd OrderGoods of the 4th OrderGoods of the 3rd OrderFigure 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.
Chapter Seven: Production: Man at Work141and cut stones, while the 3rdstage 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 7.4illustrates 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 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 DEMANDAs 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 1storder (final consumer goods). Imagine