Limited Means and Resources+ Factors of Production

We have limited means.

We only have 24 hours in a day, a limited amount of skills (we are not the good at everything as much as we hope we are), and we have limited money (it doesn’t grow on trees!)

We have limited resources.

Resources can be divided into 3 categories:

1. natural: these are what is provided for by nature e.g. raw materials
2. human: work done by people e.g. teacher, driver, lawyer
3. human-made: goods made to produce other goods e.g. machinery, hammer

When resources are used in production they are known as factors of production.There are 4 of them:

1. Land: provided for by nature with little or no human input
2. Labour: work done by people to produce goods and services
3. Capital: machinery and all other goods that are used to produce other goods and services
4. Enterprise: the act of combining the other factors of production in order to produce goods and services. The entrepreneur assumes the risk of enterprise in order to make a profit. 

 

The factors of production earn. 

Land earns rent

Labour earns wages or salaries

Capital earns interest and dividends

Entrepreneurs earn profits

Scarcity, Choice and Opportunity Cost

Scarcity is the situation where there are unlimited wants and needs but there are only limited resources. 

We constantly want more, and when we get it we just want a bit more. These goods and services that we want are produced by resources. While most of our basic human needs- food, water, shelter, housing and clothing can be satisfied with the resources. Our wants for better things cannot all be satisfied. 

Here lies the basic economic problem- how do we use our limited resources to fulfill our infinite wants and needs?

Because of scarce resources, we need to make decisions on how to use them, we need to make choices. 

A choice is a decision to use a scarce resource between competing uses. 

When we make a choice an opportunity cost is immediately created. 

An opportunity cost refers to the next best alternative forgone

Let’s look at an example!

A large piece of land can be used to build a shopping mall or a hospital.

Scarcity- a limited resource of land has numerous uses.

A decision is made to build a hospital- choice. An opportunity cost then created, the forgone shopping mall. 

 

If you do AS or above, find the post on production possibilities frontiers where these concepts are displayed graphically.