Scarce Resources and the Four Factors of Production

Scarce resources exist when natural, human, and manufactured resources are limited and must be allocated to produce goods and services.

Economists classify economic resources into four general categories: land, labor, capital, and entrepreneurial ability.

Definition: all natural resources used in the production process.
Examples: forests, mineral and oil deposits, water resources, wind power, sunlight, arable land.

Definition: the physical actions and mental activities that people contribute to the production of goods and services.
Examples: retail clerk, teacher, professional football player, nuclear physicist.

Definition: all human-produced physical objects and intangible ideas used to produce consumer goods and services.
Capital goods (physical objects): factories, storage facilities, transportation and distribution facilities, tools and machinery, electrical grids, communication satellites.
Intangible ideas (intellectual property): inventions, recipes, designs, blueprints, instructions, software.
Relationship to consumer goods: consumer goods satisfy wants directly, while capital goods satisfy wants indirectly by aiding production of consumer goods.
Important note: in economics, capital does not refer to money; money produces nothing and is not an economic resource.
Investment (economic sense): investment refers to spending that pays for the production of new physical or intangible capital.
- Example of investment: spending to create a new vaccine recipe (a new capital creation) qualifies as investment.
- Example that is not investment: purchasing an old factory (the capital already exists; no new capital is created).

Definition: the special human resource that combines land, labor, and capital to produce new products or innovations in production.
Supplied by entrepreneurs, who perform functions not performed by ordinary labor and who tend to innovate.
Key entrepreneurial functions:
- Taking the initiative in combining resources to produce a good or service; entrepreneurs are the creative force behind production.
- Making strategic business decisions that set the course of an enterprise.
- Innovating by commercializing new products, new production techniques, and new forms of business organization.
- Bearing risk: because innovation is risky, progress would cease without entrepreneurs willing to devote time, effort, and money (their own and others') to bringing new products and ideas to market.

Land, labor, capital, and entrepreneurial ability are combined to produce goods and services and are collectively called the factors of production, or simply inputs.