The Four Factors of Production (CELL) Unit 6.1

Four Factors of Production (CELL) What is Economics? Unlimited Wants Satisfied by Limited Resources

Needs vs. Wants Economics is the study of how we make decisions when resources are limited. You must decide between what you NEED and what you WANT. Needs are things we need for survival, such as food, clothing, and shelter. Wants are things that we would like to have, such as cell phones, laptop computers, flat-screen tv’s.

Scarcity The fundamental problem is scarcity. When things are scarce, we do not have enough resources to produce all the things that we would like to have. Because of scarcity, we must make choices among alternatives.

3 Basic Questions for any nation: What to Produce? How to produce? For Whom to produce? To answer these questions, economic systems were created.

What to Produce? Society must decide what to produce with its limited resources. For example, society may have to choose whether to produce goods for defense (military) or services for poor people (welfare).

How to Produce? Society must decide how to produce something. For example, should we accept more pollution from factories in exchange for greater output of products?

For Whom to Produce? Society must decide for whom to produce a product. Who will receive the goods and services? In the United States, most goods and services are distributed through the price system ($)

Economic Output Includes Goods and Services Tangible Products TV, Car, Phone, Food, Clothing, any finished product that you can buy Services Work Performed for someone else Mechanic, piano instructor, babysitter, anything where someone is offering their expertise

Four Factors of Production (CELL) Capital Entrepreneurship Labor Land

Capital Also known as capital goods Includes tools, machinery, and buildings used to make products. Capital goods are unique because they are themselves produced. You have to build a building. Consumer goods satisfy wants directly; capital goods do so indirectly by aiding production of consumer goods.

Entrepreneurs Entrepreneurs are individuals who start new businesses, introduce new products, and improve management techniques. They are innovative and willing to take risks. They drive the economy because they use factors of production to produce new products.

Labor Labor is the nation’s workforce. These are the people who work. It includes the physical and mental talents of the people who help produce goods and services. Factors such as population growth, education, and war affect the quantity and quality of labor.

Renewable Resources Some natural resources can be reproduced NATURALLY within a few years or decades. These are called Renewable Resources. Trees, water, plants, and wind are examples of renewable resources.

Productivity When a nation’s output increases over time, the economy grows. This means the circular flow becomes larger. Productivity is a measure of the amount of output produced by a given amount of inputs in a specific period of time. It reflects how EFFICIENTLY resources are being used.