Chapter 4 - Economic Resources
Chapter 4: Economic Resources
Objectives
Understand the term "factors of production"
Identify and describe resources encompassed within "factors of production"
Comprehend rewards accrued to factors of production
Distinguish between goods and services
Understand the issue of resource allocation
Identify main types of economic systems, their characteristics, advantages, and disadvantages
Factors of Production
Economic resources: Include human beings and everything used to produce goods/services wanted by people.
Known as factors of production or factor inputs used to produce goods/services.
Classified into three categories:
Natural resources
Human resources
Capital
The entrepreneur (not a category per se but considered a resource)
Natural Resources
Resources provided by nature, not by human efforts.
Land: Describes gifts of nature (e.g., gold, minerals, oil).
Human Resources
Energies, skills, and knowledge of the working population.
Labor: Human effort in various forms (manual, non-manual, skilled, unskilled).
Capital
Manufactured resources or man-made aids to production.
Items include factories, machines, railways, roads, and power stations.
The Entrepreneur
Recognized as a fourth factor, involves:
Organizing land, labor, and capital into productive units.
Risk-taking and decision-making regarding production.
Detailed Explanation of Factors of Production
Land
Nature’s Gifts: Refer to fertile soil, minerals, forests, rivers, and marine resources.
Supply Constraints: Limited supply of specific-use land (e.g., shops in a city).
19th Century Context: Thomas Malthus’ theory on population growth vs. food production, demonstrated incorrect due to new agricultural developments.
Labor
Supply Determinants:
Number of workers available.
Number of hours they are willing to work.
Affected by population size and labor laws.
Efficiency of Labor: Vital to production, measured as output per worker-hour impacted by:
Education and training quality.
Working conditions (influence on productivity).
Management and equipment efficiency.
Capital
Types of Goods:
Consumer Goods: Wanted for immediate satisfaction.
Capital Goods: Not wanted for their own sake, help firms increase outputs of consumer goods.
Depending on usage, goods can be either capital or consumer goods.
Supply of Capital:
Relates to opportunity cost and the trade-offs between consumer and capital goods.
Modern societies emphasize savings and investment in capital goods leading to future production.
Net Investment: Annual increase in capital stock, crucial for measuring economic growth.
Rewards of Factors of Production
Type | Description | Reward |
|---|---|---|
Land | Natural resources | Rent |
Labor | Physical and mental work of individuals | Wages |
Capital | All man-made tools and machines | Interest/Investment |
Entrepreneur | Organizers of land, labor, and capital production | Profit |
Goods & Services
Goods: Tangible commodities owned by individuals/firms/state.
Public Goods: Provided by government/subsidized, non-rivalrous benefits.
Private Goods: Provided by individuals/firms; diminishable and excludable.
Services: Economic activity yielding no ownership, intangible benefits (e.g., banking).
Characteristics of Services
Intangibility: Cannot be touched or stored.
Perishability: Time not used cannot be regained.
Labor Intensity: Produced by human activities.
Customization: Tailored to customer needs.
Resource Allocation
Economic Problem: Limited resources can't satisfy all wants; allocation decisions necessary including:
Balance between agriculture and manufacturing resources.
Proportion of resources for capital vs. consumer goods production.
Societal Choices:
Decisions on production quantities, methods, and distribution of goods/services.
Full Employment: All factors of production utilized to achieve maximum economic output; involves a careful balance and effective use of resources.