Factors of
Production
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?
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 earth
oLand, minerals, water
•Renewable SOURCES
oWater, air growing things
•Non-Renewable SOURCES
oCoal, oil
Factor 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 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 product
o 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 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)
HOW ARE GOODS PRODUCED?
o Capital
o 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 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?
oEntrepreneurship
o The human resource (PEOPLE) 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 Entrepreneurs
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:
th
The 4 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
STOP AND THINK
 If you started your own business what would it be?
 What are some of the 4 Factors of production you would need.
 2 examples for each
Land
Labor
Entrepreneur
CORPORATIONS- 20% OF BUSINESS 74%PROFITS
CORPORATION- SET UP
 Stock: shares of ownership in the corporation.
 Literally sell you a piece of their company and use your money
invested to further the company
 Stockholders (shareholders): owners of stock.
Reasons to own stock:
Dividends: share of corporate profits paid to stockholders
Speculation: buy in hope that price of stock will increase.
Economic Systems
How the Government influences
how I make money.
Quick Review:
• Take out a sheet of paper and answer the
following questions:
– What are Goods?
– What are Services?
– What are Resources?
– What is Scarcity?
Economic Systems
• Def. The method used by a society to
produce and distribute goods and
services.
• Or, How the government tells us what we
can get and how to get it!
All Economic Systems Must
Consider the Following Questions:
1.
2.
3.
4.
What goods and services to produce?
How will they produce them?
Who will get them?
How much will they produce now, and
how much later?
•
Each economic system answers these
questions in a DIFFERENT WAY.
Types of Economic Systems
There are 3 basic types of economic
systems.
1. Traditional Economy
• Economic questions are answered by
habits and customs (the way it has always
been done)
• Children work the same jobs parents
worked, often farming or hunter/gatherer
• Fear Change!
• Ex. Eskimos, the Amish,
Pigmies, Bush People
2. Command Economy
• The government answers the basic
economic questions
• Advantages: able to act quickly in
emergencies, provide for all people
equally
• Disadvantages: Inefficient, no incentive to
work hard or be creative
• Ex. Communist Countries (China,
Vietnam, North Korea, former
Soviet Union, Cuba)
3. Free Market Economy
• Economic questions are answered by
individual buyers and sellers.
• Supply and demand influence economy
• People act out of self interest; motive for
profit (money) drives the economy
• Also known as FREE ENTERPRISE or
CAPITALISM
• BASED ON LAISSEZ-FAIRE
• Ex. The United States, Western
Europe, Japan
I lied!
• I said there were 3 types of economic
systems, but there is a 4th!
• Mixed Economy: No economy is pure
market, pure command or pure traditional,
elements of each appear in all economies,
some have more elements of one
economy than another.
Market
Mixed
Command
USA
Great Britain
China
American Mixed Economy
• While the United States is mostly a free
market economy, it does have elements of
a command economy.
Features of American Free Market
Economy
1. Economic Freedom: individuals have the
right to choose
2. Competition: more than one producer of
good/services insures choice
3. Private Property: individuals have the
right to own their own property, including
business
Features of American Free Market
Economy (cont)
4. Self-Interest: individuals make
decisions based on what is best for them
5. Voluntary Exchange: individuals may
freely buy and sell goods
6. Profit Motive: individuals are driven by a
desire to profit (make money)
Features of American Command
Economy
1. Government regulation of some business
practices
• Ex. Wages, labor hours,
safety practice.
2. Government limits certain choices
•
Ex. Cannot buy or produce certain
goods/services
3. Government provides aid to the needy
•
Ex. Medicare, Medicaid, welfare
My Pizzeria
• How would my pizzeria function under
different economic systems?
My Pizzeria in a Free Market
• I answer the basic economic questions!
• I determine how much cheese and
pepperoni goes on the pizza
• I determine the quality of the cheese and
pepperoni
• I set my employees wages
• I set my business hours
My Pizzeria in a Command
Economy
• The government answers the basic
economic questions
• The government sets the amount of
cheese and pepperoni on each pizza
• The government determines quality of
cheese and pepperoni
• The government sets employees wages
• The government sets business hours
Problem: What does the government know
about pizza?
My Pizzeria in a Mixed Economy
• The Government and I both answer the
basic economic questions
• I determine the amount of cheese and
pepperoni on the pizzas; government
determines the quality of cheese and pizza
• I set employee wages; government sets
minimum wage for employees
• I determine business hours; government
determines whether I am safe to be open
or not