Factors of Production and Opportunity Costs
Unit 1: Scarcity and Opportunity Cost
I.

Building Blocks of the Economy
everything in the economy can be considered to be either:
1. economic goods – anything that is scarce, and therefore has a price; it requires
human effort to obtain it
Examples:
2. free goods – anything that has no scarcity and therefore is free; it does not require
effort to obtain it
Examples:
3. economic bads – anything that is detrimental and therefore has a negative value; one
pays to get rid of it; it require human effort to get rid of it
Examples:

goods and bads are relative to each person and to time and context; something can be
both a good and a bad at the same time, or can change over time:
Examples:


economics goods have positive marginal utility and economic bads have negative
marginal utility (to be discussed later)
we will primarily be discussing economic goods
II. Economic Goods

Economic goods are then broken down into either:
1. outputs (consumer goods) – can be goods (products…a physical object) or services
2. inputs (producer goods) – the resources (not necessarily natural) that go into the
production of goods and services


inputs are also known as resources, or more properly, factors of production
outputs are economic goods because they are scarce; they are scarce because the factors
of production (inputs) used to produce them are also scarce
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III.

Factors of Production
there are four factors of production:
1. land – all the natural resources used to produce a good or service; the land, water,
and air, or anything that comes from it
2. labor – the time, effort, experience, training, and education of the workers

labor includes human capital (the experience, training, and education)
3. capital – anything man made that is used to produce a good or service

sometimes capital is used to refer to money or financial capital; that is not what it
means for the purpose of this course
4. entrepreneurship – the ability to combine the other factors of production in a unique
way



notice money is not a factor of production
money cannot be used to make a product or service, rather it used to purchase the
other factors of production
in capitalism, the private sector owns the factors of production and sells them for
money in order to then buy goods and services
owners of land receive….
owners of labor receive….
owners of capital receive….
IV. Resource and Opportunity Costs


in economics, we will most often not be discussing dollar costs
instead, we will focus on resource costs and opportunity costs
resource costs – the amount of the factors of production that were used to produce a
good or service

since economics analyzes the choices people make in satisfying unlimited wants and
needs with limited resources; we must compare their decisions with what else they could
have consumed or produced
opportunity costs – the best alternative use of those factors of production; what was not
produced
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