Economic Resources and Economic Decisions

Producing Goods and Services Economic output includes goods, or tangible products, and services—work performed for someone else.

Four Factors of Production Four factors of production are needed to produce goods and services: Natural Resources Labor Capital Entrepreneurs

Natural Resources Natural resources are all the gifts of nature that make production possible, such as land, rain, forests, and minerals.

Labor Labor is the nation’s workforce or human resources. 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.

Capital Capital, or capital goods, includes the tools, machinery, and buildings used to make other products. Capital goods are unique because they are themselves produced. 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.

Question How are capital goods different from consumer goods?

Answer/Suggestions How are capital goods different from consumer goods? Consumer goods are things like clothes, clocks, shoes, and foods that satisfy wants directly. Capital goods satisfy wants indirectly. They are the tools, machinery, and buildings used to produce consumer goods.

Trade-Offs Economic decision making requires that we take into account all the costs and all the benefits of an action. Economic choices involve trade-offs, or exchanging one thing for the use of another.

Opportunity Cost Opportunity cost is what you cannot buy or do when you choose to do or buy one thing rather than another. It is the next best alternative that you had to give up for the choice you made.

Fixed, Variable and Total Cost Fixed costs are expenses that are the same no matter how many units of a good are produced. Variable costs are expenses that change with the number of products produced. If a business produces more, variable costs like raw material and wages will increase. Fixed costs plus variable costs equal total costs.

Marginal Cost Marginal cost is the extra cost of producing one additional unit of output. If it costs an extra $50 to produce one more bicycle helmet, the marginal cost is $50.

Marginal Benefit We usually do something because we expect to achieve some benefit. Marginal benefit is the additional benefit associated with an action.

Cost-Benefit Analysis Cost-benefit analysis is an economic model used to compare marginal costs and marginal benefits of a decision. You should choose an action when the benefits are greater than the costs. If costs outweigh benefits, you should reject the option.