Chapter 2: Economic Resources and Systems

Economic Resources

Making Economic Decisions

• Resources are the items that go into the making of goods and services.
• This lack of resources is called $scarcity$.
    * The principle of scarcity states that there are limited resources for satisfying unlimited wants and needs.
• Because resources are in limited supply, to have one thing may mean giving up something else.
• When dealing with scarcity, it is important to think of the best way to use the item that is in short supply.

Factors of Production

• $Factors of production$ are all the economic resources necessary to produce a society’s goods and services
    * There are four factors of production: natural resources, labor resources, capital resources, and entrepreneurial resources.
• $Natural Resources$ are raw materials from nature that are used to produce goods.
    * Natural resources can often be processed in various ways to create goods.
• The economy of many countries is primarily based on its natural resources.
• Some natural resources, such as wheat and cattle, are renewable
    * Other resources are limited, or nonrenewable
    * The amount of natural resources available to a society has a direct effect on its economy.
• $Labor resources$ are people who make the goods and services for which they are paid.
    * Labor can be skilled or unskilled, physical or intellectual.
• $Capital resources$ are the things used to produce goods and services, such as buildings, materials, and equipment.
    * They are also called capital goods.
    * They include delivery trucks, supermarkets, cash registers, and medical supplies.
• $Entrepreneurial resources$ are used by the people who recognize opportunities and start businesses.
    * $Entrepreneurship$ is the process of recognizing a business opportunity, testing it in the market, and gathering the resources necessary to start and run a business.
    * An $entrepreneur$ is an individual who undertakes the creation, organization, and ownership of a business.
      * He or she accepts the risks and responsibilities of business ownership to gain profits and satisfaction
• Entrepreneurial resources are different from labor resources, even though people provide both.
• Entrepreneurial resources are individuals who start and direct businesses to produce goods and services to satisfy needs or wants.
• Labor resources are people who produce the goods or services.

Economic Systems

Basic Economic Questions

• $Economics$ is the study of how individuals and groups of individuals strive to satisfy their needs and wants by making choices
• Societies make economic decisions about how to meet the needs of people by answering three basic economic questions.
    * What should be produced?
      * Deciding to use a resource for one purpose means giving up the opportunity to use it for something else.
        * This is called an opportunity cost
    * How should it be produced?
      * The methods and labor used as well as the quality of items produced are important factors.
    * Who should share in what is produced?
      * The amount of income people receive determines how many goods and services they can have.

Different Types of Economies

• $Economic systems$ are the methods societies use to distribute resources.
    * Different economic systems answer the three basic economic questions in different ways.
• Two basic types of economic systems are a market economy and a command economy.
    * A $market economy$ is an economic system in which economic decisions are made in the marketplace.
      * The marketplace is where buyers and sellers meet to exchange goods and services, usually for money.
      * A market economy can also be called a private enterprise system, the free enterprise system, or capitalism.
      * In a market economy, resources are privately owned.
        * The government works to promote free trade and prevent unfair trade practices.
        * There is an uneven distribution of income.
• In a market economy, individuals are responsible for being informed and making careful decisions.
    * There is a relationship between price, supply, and demand.
    * The price for an item is determined through the interactions of supply and demand.
• $Price$ is the amount of money given or asked for when goods and services are bought or sold.
• $Supply$ is the amount of goods and services that producers will provide at various prices.
• $Demand$ is the amount or quantity of goods and services that consumers are willing to buy at various prices.
    * The higher the price, the less consumers will buy.
    * The lower the price, the more consumers will buy.
    * The $equilibrium price$ is the point at which the quantity demanded and the quantity supplied meet.
• In a market economy, competition is observed.
• Profit motive is the desire to make a profit, and profit is the reward for taking a risk and starting a business.
    * A $command economy$ is an economic system in which a central authority makes the key economic decisions.
      * The government dictates what will be produced, how it will be produced, and who will get the goods.
      * Goods that are not considered necessities are often unavailable.
      * Prices are controlled by the state.
      * Highly skilled workers may earn the same wages as low-skilled workers.
• In a moderate command economy, also called socialism, there is some form of private enterprise.
• Most nations have a mixed economy in which private ownership of property and individual decision making are combined with government intervention and regulations.
• A $mixed economy$ is an economy that contains both private and public enterprises.
    * A mixed economy combines elements of capitalism and socialism.