Chapter1 - Chapter 1. Economics: the Core Issues Economics...

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Chapter 1. Economics: the Core Issues Economics is the study of how people use scarce resources in an attempt to satisfy their unlimited wants. Resources are inputs used to produce goods and services. They are also called factors of production . Factors of Production: There are four basic factors of production Land : Includes the ground and natural resources such as crude oil, water and minerals. Labor : Includes skilled and unskilled labor. Both the quantity and the quality of human resources are included in the labor factor (e.g., skilled, unskilled …etc). Capital : Final goods produced to be used as inputs in further production. It includes machines, equipment, buildings. Example: residents of a fishing village in southern Thailand braided huge fishing nets to catch more fish. The fishing nets are regarded as capital. Entrepreneurship : This factor of production is related to how well a given quantity of resources can be used in production. Entrepreneur is the person who sees the opportunity of new or better products and brings together the resources needed for producing them. The entrepreneur is an organizer and a risk taker . Payments to Resources (returns to factors of production): Land is paid rent Labor is paid wages Capital is paid interest or the rental price of capital. Entrepreneur is rewarded profit. Limits to Output Since resources are insufficient to satisfy all desired uses, then there is scarcity , which is the core problem.
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Scarcity: The imbalance between our desires and available resources. Then economic scarcity forces us to make economic choices . The most cited example is the choice between more defense spending (guns) or more spending on civilian goods and services (butter). (in 1986 the defense budget / total output was 6%, and this share dropped to 3% in 2001). This decline in defense spending share is refereed to as the
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Chapter1 - Chapter 1. Economics: the Core Issues Economics...

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