Factors of Production

The Basic Economic Problem

The best way to introduce economics is by introducing the basic economic problem of scarcity. Since there are limited resources to produce goods, and there are unlimited human wants, we face a decision over the efficient allocation of these scarce resources or factors of production. When we choose how we allocate these factors of production, we have to sacrifice the next best alternative. The value of this next best alternative is called opportunity cost. There are four factors of production: land, labor, capital and entrepreneurship.

Four Factors of Production:

Factors of Production

Land/Natural Resources

These are free gifts that are given by nature.Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.

Labor

This factor of production involves any kind of human input.If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people.

Capital

Here capital refers to manufactured resources such as factories and machines.Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans. The income earned by owners of capital resources is interest.

Entrepreneurship

An entrepreneur is someone who takes on risk and brings factors of production together. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. The payment to entrepreneurship is profit.

Other Introductory Economic Terms:

 Normative Statements

Normative statements are statements with values or opinions. Ex. Outsourcing jobs is unfair because it takes away local jobs.

 Positive Statements

Positive statements are factual statements. Ex. Tax hikes will cut the budget deficit.

 Free Goods

A free good is a good that isn’t scarce and has zero opportunity cost. Example: Air

 Economic Goods

Economic goods are goods and services that require scarce resources to produce them.

Opportunity Cost


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