Chapter 1: Ten Principles
Factors of Production (also called factors, resources or sometimes, inputs).
What are the four factors of production?
- land, labor, capital and entrepreneurship.
Land refers to natural
resources, atmospheric resources, environmental resources, flora, fauna, marine resources. Labor = labor
services that you provide firms in exchange for wages. “Capital” in economics refers only to “physical
capital” i.e. plant, equipment, machinery used to produce other goods.
These capital goods are “human
made”. So for example, a firm that produces commercial refrigerators is producing a capital good.
uses “land”, “labor”, “physical equipment” and “entrepreneurship”.
Restaurants purchase commercial
refrigerators to produce their goods – meals at a restaurant. Stocks, bonds, cash do not count as physical
“Entrepreneurship” is the act of bringing together the resources to produce goods and services,
undertaking risk and conceiving the idea of production.
is also called “
”. It refers to goods and services produced by producers using the factors of
production and available technology.
Output is sold in “output” markets or “product” markets. For instance,
the term “gross domestic product” means the output of goods and services produced within a domestic
economy during a given period.
When economist use the term “cost”, we refer to “economic cost “ or “opportunity cost” which can be
defined as follows: the cost of
resources used to produce a good or service.
When a good is produced or
an activity undertaken, something else is foregone. Hence the term “opportunity cost”.
Opportunity Cost is made up of
For example, the opportunity cost of seeing a movie includes the
plus the time cost
(implicit cost; does not involve a monetary outlay)
of going to the theater and attending
The time cost depends on what else you might do with that time; if it's staying home and watching
TV, the time cost may be small, but if it's working an extra three hours at your job, the time cost is the money
you could have earned.
Here are some examples:
Sanders is a two sport athlete who plays both pro football and baseball. He could earn $1,000,000
playing either. Troy is also a two sport athlete who plays both football and auto racing. He could earn
$1,000,000 playing football or $200,000 racing cars. Biaji can play both football and soccer. He could