HGov: Factors of Production


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Economists refer to the things people want as either goods or services. Goods are tangible things that you can see and touch. Services are intangible things that have value. Haircuts, medical care, and education are examples of services. As goods and services are used to satisfy our wants, they are consumed. For that reason those who buy goods and services are called consumers and the act of consuming is called consumption.

The ingredients that go into the production of goods and services are productive resources or the factors of production. Human wants are virtually unlimited, the productive resources to satisfy those wants are relatively scarce. Therefore, scarcity is a fact of life, one which every individual and institution must deal with by choosing among resources. All human wants cannot be satisfied at the same time. People’s wants are unlimited, but the factors of production – land, labor, capital, and entrepreneurship – are limited. All human wants cannot be satisfied at the same time. People’s wants are unlimited, but the factors of production – land, labor, capital, and entrepreneurship – are limited. Economics is the study of how people and societies use their limited resources to satisfy their unlimited wants.

Economists use the word land to mean natural resources of all kinds. Some regions of the world have a low standard of living because they have few natural resources. In economic terms, standard of living refers to the quantity and quality of goods and services consumed by an individual or a society. The only way to improve the economies of these lands is to strengthen their other productive factors – labor, capital, and entrepreneurship.

When economists talk about human resources, labor, or the work force, they are describing the people whose efforts and skills go into the production of goods and services. Without human resources goods and services could not be produced. People affect the production of goods and services in two ways. First, the size of the work force affects the amount of goods and services produced. If a country has too few workers, it will be unable to make full use of its other resources. However, numbers of workers alone do not determine how much a society can produce. Even more important is productivity, which is the amount each worker produces in a specific time. Productivity is determined largely by the availability of machinery, equipment, and skilled workers.

The machines, tools, and building that are used to produce goods and services are called capital or capital goods. The term capital as it is used here should not be confused with money, which in other contexts is also called capital. Money does not produce goods; machines, tools, and buildings do. Capital is eventually used up or worn out, a process called depreciation. If new capital is not produced to replace capital that has depreciated, fewer goods can be produced. In order to increase production, a nation must produce more or better capital goods than are needed merely to make up for depreciation. The production of capital goods is called capital formation. Because capital goods are so vital to the production of goods and services, capital formation is an essential economic process in all societies. Unlike consumer goods, capital goods do not satisfy human wants immediately. Instead they are used in the production of other goods – either consumer goods or other capital goods. Capital produced in the present satisfies human wants at a future time. Since there is a limit to the amount a nation can produce at any one time, capital formation requires a decision to do without some consumer goods now in order to have more later.

For a business to function, some person or group has to bring together the three factors of production: land, labor and capital. This function is performed by persons known as entrepreneurs who invest their money in a business to make a profit. Entrepreneurs are the owners of a business. They see that the business operates efficiently and may hire managers to handle the day-to-day management of the business.

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