The Core Concepts in this lesson are:
The Basic Economic Questions
Functions of Government
Product and Factor Markets
Suppose you were hired by Castro to advise him on how he should organize production in Cuba.
What would you tell him? What things would you tell him the government should do and what
things should he let markets do? What goods should the government produce or subsidize?
Should the government do anything? Should the Cuban people be allowed to buy goods from
foreign firms and how should Castro decide what goods should be imported and which goods
should be exported? Reform of the Cuban economy appears to be very complicated. The
following concepts will help you develop an understanding of the problem Castro and the Cuban
To examine the process of choice, we can begin by identifying the scarce resources that exist.
The Productive Resources are divided into four broad categories: labor, land, capital, and
enterprise. All resources used to produce goods and services fit into one of these four categories.
Labor is the resource of production with which you are probably most familiar. Labor is the
physical and mental work of human beings. The efforts of a factory worker, a professional
basketball player, a university professor, and a carpenter are all labor.
Wages are the payments labor receives for its productive services. Some labor is valued (and
paid) more than other labor. Why? One reason is that some labor is more productive. Workers are
born with different talents and abilities. Some are more intelligent. Others are physically stronger
or better coordinated. Still others have artistic or musical ability. It is also possible to make labor
more productive by devoting money and time to improving skills. Individuals invest in their
labor skills by going to college, serving as apprentices, or practicing. Economists refer to this
development of labor skills as an investment in human capital. Human capital consists of
knowledge and skills that increase labor's productivity. A large part of wage differences can be
explained by differences in human capital.
The second resource is land. Land, to an economist, is not just rocks and soil, but all natural
resources that can be used as inputs to production. By this definition, land includes minerals,
water, air, forests, oil, and even rainfall, temperature, and soil quality. The income paid to this
resource is called rent.
A key distinction between land and other productive resources is that land consists of natural
resources or conditions, unimproved by any human activity. For example, acreage in Arizona that
has been irrigated represents more than land. It also represents capital, the third resource. Thus,
part of the payment that is called rent is a return to land, but part of it may be a return to capital.