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
oWater, air growing things
•Non-Renewable
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/WHERE 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 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)
Oil Consumption by Country
HOW ARE GOODS
PRODUCED?
HOW ARE GOODS
PRODUCED?
•
HOW ARE GOODS PRODUCED?
HOW ARE GOODS PRODUCED?
o Capital
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 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 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
• Scarcity- Nearly all resources are scare,
meaning there is a limited supply available
to meet unlimited wants
o 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 Entrepreneurs
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 Entrepreneurs
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 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
HOW ARE GOODS
PRODUCED?
•
Factors of Production
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
Did your chart come out like this?
LAND
WEALTH FOR CONSUMPTION
Oil in the Ground
Food on your table
Fish in the Ocean
A House You Live in
A Building Site
WEALTH USED IN PRODUCTION
A Broadcast
Food in a Restaurant
Frequency
Your Mom's old House, which you
LABOR
Rent to Tenants
Teaching
A Truck
Ditch Digging
CLAIMS ON WEALTH
Computer
A $100 Bill
Programming
A Certificate for 100 Shares of
Playing Music in the
Microsoft
Subway