What is a Plant in the Study of Economics?

The Economic Definition of a Plant

Power plant cooling towers at sunrise
Power plant cooling towers at sunrise. Getty Images/Bill Brooks/Moment

In the study of economics, a plant is an integrated workplace, usually all in one location. A plant generally consists of the physical capital like the building and equipment at a particular location that is utilized for the production of goods. A plant is often also known as a factory.

Power Plants

Perhaps the most common phrase associated with the economic understanding of the term plant is the power plant. A power plant, also known as a power station or generating plant, is the industrial facility involved in the generation of electric power. Like a factory where goods are manufactured, a power plant is a physical location at which utilities are generated.

Today, most power plants generate electricity through the burning of fossil fuels like oil, coal, and natural gas. In light of the push for more renewable sources of energy, today there also exist plants dedicated to the generation of power through solar, wind, and even hydroelectric sources. But of particular international discussion and debate are those newer power plants that harness nuclear power.

The Relevance of Plants in Economics

Though the word plant is sometimes used interchangeably with the words business or firm, economists use the term strictly in relationship to a physical production facility, not the company itself. So rarely is a plant or factory the sole subject of economic study, but rather it is generally the business and economic decisions that take place surrounding and within the plant that are the topics of interest.

Taking a power plant as the example, an economist might be interested in the manufacturing economics of the power plant, which is generally a matter of costing which involves both fixed and variable costs. In economics and finance, power plants are also considered long-lived assets that are capital intensive, or assets that require investments of large sums of money. As such, an economist might be interested in performing a discounted cash flow analysis of a power plant project. Or perhaps they are more interested in the return on equity of a power plant as for regulated utilities, it may be determined by a regulatory body.

On the other hand, another economist might be more interested in the economics of plants in terms of industrial structure and organization, which might include an analysis of plants in terms of pricing decisions, industrial groupings, vertical integration, and even public policy affecting those plants and their businesses. Plants also hold relevance in an economic study as the physical centers of manufacturing, the costs of which are very much intertwined with sourcing decisions and where companies choose to set up the manufacturing portion of their business. The study of the economics of global manufacturing, for example, is of constant debate in the financial and political spheres.

In short, though the plants themselves (if understood as the physical location of manufacturing and production) are not always the primary subjects of economic study, they are at the center of the real world economic concerns.