Factors of Production and Incentives and Institutions

physical capital: the stock of tools that include machines, structures, and equipment
human capital: the productive knowledge and skills that workers acquire through education, training, and experience
technological knowledge: knowledge about how the world works and is sued to produce goods and services
organization: human capital, physical capital, and technological knowledge must be organized to produce valuable goods and services

pay a worker more money if he provides goods and services of value to consumers or if she invents new ideas
who provides incentives?
- institutions

institutions: the “rules of the game” that shape human interaction and structure economic incentives within a society
- include laws and regulations, but also customs, practices, organizations, and social norms
big idea 2: good institutions align self-interest with the social interest
wealthy countries have institutions that make it in people’s self-interest to invest in physical capital, human capital, and technological knowledge and to efficiently organize these resources for production
what kinds of institutions encourage investment and the efficient organization of the factors of production?
- property rights
- honest government
- political stability
- a dependable legal system
- competitive and open markets

secure property rights: right to own property and protect it from confiscation
property right: important institutions for encouraging investment in physical and human capital
under communal property, effort is divorced from payment so there is incentive to free ride
- free rider: someone who consumes a resource without working or contributing to the resources upkeep
when China switched from communal to individual farms, food production increased by 50% and 170 million people were lifted above the lowest poverty line
savings are necessary to generate investment and growth
- why do people save and invest?
- savers won’t save and investors won’t invest if they don’t expect they’ll receive a return for their savings and investment