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Factors of Production

The Five Steps of Economic Decision-Making

  1. Define the problem. What is the decision that needs to be made?
  2. Identify possible alternatives. What are the different options available?
  3. Develop criteria and a ranking system. How will the alternatives be evaluated?
  4. Evaluate alternatives against the criteria. Which alternative is the best?
  5. Make a decision. Implement the chosen alternative.

Economic Fundamentals

  • Our wants always exceed our resources. We desire many things, but we can only afford to have a limited number of them.
  • The choices we make are influenced by our wants and our resources. We have to decide what we want most and what we are willing to give up to get it.
  • The choices we make can have a big impact on our lives. The decisions we make about our education, our careers, and our relationships can all affect our happiness and success.

Scarcity

Types of Scarcity

  • Absolute scarcity means that there is not enough of a resource to meet everyone's needs.
  • For example, there is not enough water for everyone in the world to have enough to drink.
  • Relative scarcity means that there is not enough of a resource to meet everyone's wants.
  • For example, there is not enough money for everyone in the world to have a private jet.

The Causes of Scarcity

There are three main causes of scarcity:

  • Limited resources: There are only a finite number of resources in the world.
  • Unlimited wants: We have unlimited wants for goods and services.
  • Different wants: People have different wants, and these wants often conflict with each other.

The Consequences of Scarcity

  • Scarcity forces us to make choices.
  • We have to decide which of our wants are most important and which ones we can afford to give up.
  • Scarcity also leads to competition.
  • People compete for resources, and this can lead to conflict.

Human Capital

Human capital is the skills and knowledge that people have that can be used to produce goods and services.

Importance of Human Capital

  • Human capital is important for economic growth.
  • A more skilled workforce can produce more goods and services.
  • Human capital can also help to reduce poverty.

Ways to Increase Human Capital

  • Education: Education is the most important way to increase human capital.
  • Training: Training can help people to develop new skills and knowledge.
  • Experience: Experience can also help people to develop skills and knowledge.

Capital

  • Capital is the tools, machines, and buildings used in the production of other goods and services.
  • It can take a surprising number of forms, from simple screwdrivers to complex supercomputers.
  • Capital has replaced labor in many industries, but it has also created new jobs in the design, production, and maintenance of new machines.

Financial Capital

Money used in the production of goods & services

Physical Capital

Goods and services used in the production of other goods & services

Entrepreneurship

Ability to combine land, labor, and capital in new ways to produce goods & services

Types of Entrepreneurship

Innovator

Thinks of ways to use new inventions, technologies, or techniques to into goods & services

Strategist

Supplies vision and key decisions to set direction for new businesses

Risk-Taker

Not afraid to put in the time, effort, and resources not knowing if they will succeed

Sparkplug

Supplies the energy, determination, and enthusiasm needed to turn ideas into reality

Productivity

Production Equation

graph TD
    G[Goods and Services]
    Land --> G
    Labor --> G
    Capital --> G
    Entrepreneurship --> G

Producitivty Ratio $$ \frac{\text{Output}}{\text{Input}} $$

How can we increase productivity?

  • Increase the amount of resources
  • Increase the amount of output
  • Increase the amount of output per unit of input

Choices

Utility

Satisfaction one gains from the consumption of a good or service

Marginal Utility

Satisfaction from the consumption of one or more unit

Law of Diminished Marginal Utility

As you consume more units of any good or service, the additional satisfaction from each additional unit will eventually start to decrease

Opportunity Cost

Value of the next best alternative you could have chosen

Knowing the cost or value of your choices can help you make a decision now

Production Possibility Frontier

An economic model that shows (at the moment) all combinations of how an economy might use its reousrces to produce two goods

Economic Efficiency

Using resources to produce the maximum amount of goods and services

Production Possibility Curve

Production Possibility Curve

Represents the maximum amount of goods and services that can be produced using a fixed amount of resources

  • Any point along the curve that meets the needed demand is allocative efficient
  • Any point along the curve that minimizes costs is productive efficient
  • Anything inside the curve is economically inefficient
  • Anything outside the curve is unattainable

Shifters of the PPC

  • Change in the quantity of resources
  • Change in the quality of resources
  • Change in technology
  • Change in trade