Factors of Production

1. Factors of Production • The resources required to produce the things we would like to have. • AKA. Resources, inputs • Land • “gifts of nature”, “raw materials” • Forests, livestock, mineral deposits, etc. • Are trees considered part of “land?”

2. Factors of Production(cont.) • Labor • People—with all of their efforts, abilities, and skills • This resource is considered variable • Capital (or Capital Goods) • The tools, equipment, machinery, and factories used in the production of goods and services. • Capital goods help turn “land” into goods • Considered variable • Financial Capital (money)

3. Factors of Production(cont.) • Entrepreneurs • Risk-takers in search of profits • The entrepreneur pools and organizes the factors of production to make goods and services

4. Other Economic Concepts • The Paradox of Value • Why is it that water has little monetary value compared to diamonds? • Points out the difference between necessity and value • Value is a product of scarcity and utility (measured in utils)

5. The Production Possibilities Model • Illustrates the alternatives and choices that society makes given its scarce resources • This hypothetical society requires 4 assumptions • Full Employment • Fixed resources • Fixed technology • Two goods (usually Consumer goods and Capital goods)

6. Production Possibilities Model • The table shows the opportunity cost of producing one good over the other • The costs are increasing because resources are not perfectly suitable for both products