Factors of Production

Factors of Production

1. Land:natural resources
2. Labor: work exerted
3. Capital:
1. Human Capital: when people acquire skills and knowledge through experience and education
2. Physical Capital: consist of money, tools, buildings, equipment, and machinery
4. Entrepreneurship: risk-taker, innovative

• Trade offs: an alternative that we sacrifice that we make a decision (Scarcity leads to Tradeoffs)
• Opportunity Cost: the most desirable alternative given up as a result of a decision
• Guns or Butter: refers to tradeoffs that the governments make when choosing whether to produce more or less military or consumer goods
• Thinking at the Margins: deciding whether to add or subtract one additional unit of some resource
• Production Possibilities Graph (PPG): graph that shows alternative ways to use an economy's resources

     Curve (PPC)       

     Frontier (PPF)

• Efficiency: using resources in such a way to maximize the production of goods and services (increases profits)
• Underutilization: (opposite of efficiency) using fewer resources than an economy is capable of using. (leads to a decrease in profit)

4 key Assumptions (PPG):

1. Only 2 goods can be produced
2. Full employment of resources
3. Fixed Resources (factors of production)
4. Fixed Technology