ECON 2002.01 - Chapter 2 (Production, Economic Growth, and Trade)

production

the process of converting resources (factors of production) - land, labor, and entrepreneurial ability - into goods and services

resources

productive resources include land (land and natural resources), labor (mental and physical talents of people), capital (manufactured products used to produce other products), and entrepreneurial ability (the combining of the other factors to produce products and assume the risk of the business)

land

includes natural resources such as mineral deposits, oil, natural gas, water, and land in the usual sense of the word. the payment for use of land as a resource is rent.

labor

includes the mental and physical talents of individuals who produce products and services. the payment to labor is wages.

capital

includes manufactured products such as tractors, welding equipment, and computers that are used to produce other goods and services. the payment to owners of capital is interest.

entrepreneurs

entrepreneurs combine land, labor, and capital to produce goods and services. they absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. entrepreneurs earn profit for their effort.

production efficiency

goods and services are produced at their lowest resource (opportunity) cost

allocative efficiency

the mix of goods and services produced is just what society desires

imports

goods and services that are purchased from abroad

exports

goods and services that are sold abroad

absolute advantage

a country can produce more of a good than another country using the same amount of resources

comparative advantage

a country has a lower opportunity cost of producing a good than another country

autarky

a country that does not engage in international trade, also known as a closed economy