Factors of Factors of ProductionProduction

HOW ARE GOODS PRODUCED?HOW ARE GOODS PRODUCED?

Factors of production

The productive resources used to produce goods and services.Factors of production are grouped into four categories:

• Land (Natural Resources)• Labor (Human Resources)• Capital• Entrepreneurship

HOW ARE GOODS PRODUCED?HOW ARE GOODS PRODUCED?

Land

oWhat Raw materials are needed to produce your product?

oThe “gifts of nature” that we use to produce goods and services. All the things we call natural resources.oComes from the air, water, or the earthoLand, minerals, water

•Renewable oWater, air growing things

•Non-RenewableoCoal, oil

Factor 1: Natural ResourcesFactor 1: Natural Resources• Nature supplies raw materials

necessary to make things

• These raw materials are called Natural Resources

–Example: Chicken noodle soup contains chicken meat, spices, water, and vegetables, all of which came from the nature

HOW ARE GOODS HOW ARE GOODS PRODUCED?PRODUCED?

Figure 2.5 shows how long the known reserves of nonrenewable energy resources will last at the current growth rates of use.

New reserves are constantly being discovered.

HOW ARE GOODS HOW ARE GOODS

PRODUCED?PRODUCED?

HOW ARE GOODS PRODUCED?HOW ARE GOODS PRODUCED?

Labor

• What will your employees have to do to create your product?

• What work will need to be done to turn your raw material into your finished producto Work time and work effort that people devote to producing goods and services

• People’s efforts, labor• Effort can be physical or mental

Factor 2: Human LaborFactor 2: Human Labor• Human effort used to produce goods

and services is called labor

• Labor can be physical or mental

•Example: to the soup, farmers raise the animals and crops, a truck driver drives them to a factory, and workers operate machinery to mix and can it (physical labor)

•Someone has to design the machines, and think of a recipe for the soup (mental labor)

Oil Consumption by CountryOil Consumption by Country

HOW ARE GOODS HOW ARE GOODS PRODUCED?PRODUCED?

Figure 2.6shows theU.S. laborforce andhow it haschangedsince 1980.

HOW ARE GOODS HOW ARE GOODS PRODUCED?PRODUCED?

•

HOW ARE GOODS PRODUCED?HOW ARE GOODS PRODUCED?

HOW ARE GOODS PRODUCED?HOW ARE GOODS PRODUCED?oCapital o What equipment and people will you need

to create your product

o Physical capital: What tools, machines and factories will you needed to create your product

o Financial capital: funds the firm use to buy physical capital

o Human capital: What knowledge, skills, education and experience will your employees need to have in order to produce your product (for example: a seamstress , a chemist, a computer technician )

• Goods made by people and used to produce other goods and services

• Tools, instruments, machines, buildings, and other constructions that have been produced in the past and that businesses now use to produce goods and services.

Factor 3: Capital ResourcesFactor 3: Capital Resources• Producing goods and services requires

tools and equipment • The buildings, machines, supplies, etc.

used to produce are called capital resources, or capital goods

•Examples: the truck used to drive to the factory, the machines used to can the soup, and the factory building itself

HOW ARE GOODS PRODUCED?HOW ARE GOODS PRODUCED?

• Figure 2.7 shows measures of human capital and how they have changed since 1910.

HOW ARE GOODS PRODUCED?HOW ARE GOODS PRODUCED?oEntrepreneurship

o The human resource that organized and combines

labor, land, capital.

• The quantity and quality of entrepreneurship is hard to describe and measure.

• But we can easily recognize brilliant entrepreneurs by their enormous financial success.

o Sam Walton (Wal-Mart), Bill Gates (Microsoft), and Michael Dell (Dell Computers) are examples of outstanding entrepreneur's.

Influences on EntrepreneursInfluences on Entrepreneurs

Decision Making Decision Making• Scarcity- Nearly all resources are scare,

meaning there is a limited supply available to meet unlimited wantso The more scarce a resource, the more

expensive it is.o Inverse Economic Relationship –

when fruit is out of season, supply is more scarce –• This causes the price to increase

because it is more valuable

Influences on Influences on EntrepreneursEntrepreneurs

Decision Making Decision Making• Opportunity Cost – resources

are scare, the choice to use a resource in one way means not using it in another.oUse a field to grow corn means the field cannot be used to grow soy beans

Influences on Influences on EntrepreneursEntrepreneurs

Decision Making Decision Making• Productivity- is a measure of the amount of

output produced by a given amount of inputs. It reflects how efficiently resources are being used.

• This is also referred to as measuring the efficient use of the factors of production. o For example, the productivity of a farmer

(labor) increases with the use of a tractor (capital).

o Investing in human capital is one way to increase productivity

Influences on Influences on EntrepreneursEntrepreneurs

Decision Making Decision Making• To realize a profit, produce good/service

at a cost lower than the market price for the good or service.

• Profit is the money left over from selling a good or service after the cost of buying productive resources have been paid. o Minimize the use of scarce resource in

production o Maximize the productivity of the factors used

in production to keep cost as low as possible.

Entrepreneurship: Entrepreneurship: The 4The 4thth Factor Factor• Making the other 3 factors of production

into something useful often takes creativity and some risk

• Entrepreneurship is the factor of production that ties the others together

•Examples: Someone has to decide what to name the soup, where to sell it, and how much to charge

HOW ARE GOODS HOW ARE GOODS PRODUCED?PRODUCED?

•

In order to study economic relationships, we need a sensible way to categorize the various things in our economic world. Take a look at this list of things that have value. Which of them would you place in

the category of LABOR? Which are LAND? Which are CAPITAL? Are there some that don't fit in any of the three?

Some Things that Have Value:

   Food in a Restaurant   Oil in the Ground   Your Mom's old House, which you Rent to Tenants   Fish in the Ocean   Teaching   A Building Site   Food on your table   A $100 Bill

   A House You Live in   A Truck   A Broadcast Frequency   Ditch Digging   Computer Programming   A Certificate for 100 Shares of Microsoft   Playing Music in the Subway

Factors of ProductionFactors of Production

Did your chart come out like this?

LAND   Oil in the Ground   Fish in the Ocean   A Building Site   A Broadcast Frequency

LABOR   Teaching   Ditch Digging   Computer Programming   Playing Music in the Subway

WEALTH FOR CONSUMPTION   Food on your table   A House You Live in

WEALTH USED IN PRODUCTION   Food in a Restaurant   Your Mom's old House, which you Rent to Tenants   A Truck

CLAIMS ON WEALTH   A $100 Bill   A Certificate for 100 Shares of Microsoft