SCARCITY & RESOURCES
The Factors of Production
SCARCITY
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Scarcity
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limited quantities of resources to meet unlimited
wants. This is the basic problem of economics.
Scarcity is not the same as a shortage.
 Shortage
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when a good or service is unavailable, suppliers will
not or cannot offer the good or service (it may not
actually be that scarce).
All resources are limited and are subject to
scarcity.
RESOURCES
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The three types or resources are:
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Land
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Labor
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natural resources that are used to make goods and services.
the effort that people devote to a task for which they are
paid. Divided into physical and human.
Capital
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any human-made resource that is used to create other goods
and services.
FACTORS OF PRODUCTION
Entrepreneurship is an individual’s ability to
start a new business, to introduce new product
and techniques, and to improve management
techniques.
 Entrepreneurship combined with the three types
of resources (Land, Labor & Capital) make up the
Factors of Production.
 The factors of productions are then used to
produce Goods and Services.
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TRADE-OFFS & OPPORTUNITY COST
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A trade-off is defined as an alternative that we
sacrifice when we make a decision. This applies to
individuals, families, corporations and societies.
People face trade-offs. Every decision involves
choices, more of one good means less of another.
Example:
The most desirable alternative given up when we
make a decision is called the opportunity cost.
The Cost of something is what you give up to get it.
Whatever we choose to do, we could have chosen to do
something else instead. Some costs are obvious such
as out-of-pocket expenses, other costs are less obvious
but must be included in total opportunity cost.
Only actions have costs; if there is no choice there is
no cost. Cost is subjective.
THINKING AT THE MARGIN
Thinking at the Margin involves deciding
whether to do or use one more additional unit of
some resource.
 Rational people think at the margin.
 Economics assumes that people act rationally.
That they try to act so as to gain the most benefit
for themselves compared to the costs.
 Microeconomics focuses on small (marginal)
changes, such as the cost or benefit of a small
increase or decrease. If the benefits outweigh the
costs - do it!
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PRODUCTION POSSIBILITIES
A Production Possibilities Curve is a graph
that shows alternative ways to use an economy’s
resources.
 PPCs show alternative ways to use an economy’s
productive resources. Guns and butter!
 The Production Possibilities Frontier is the
line on a production possibilities graph that
shows the maximum possible output
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PPC CURVE
INCENTIVES & SUBSTITUTES
People respond to incentives
 If rational people compare costs and benefits, then
changes in either one may change decisions
 People respond to incentives like changes in
prices
 All actions have substitutes
 Principle of substitution: when the opportunity cost
in an activity increases, people substitute other
activities in its place. The closer the substitute, the
greater is the degree of switching that takes place
when the opportunity cost changes
 For example, skiing is a substitute for skating;
drinking Coke is substitute for drinking Pepsi
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