Factors of Production and the Production Possibilities Curve

Read Sections 2.1 and 2.2. Take a moment to read through the stated learning outcomes for this chapter, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Also, attempt the "Try It" problems for each section before checking your answers.

The first section of the chapter will introduce you to the four factors of production that are present in the economy: labor, capital, natural resources, and entrepreneurship. Using any two factors of production, you can then learn to construct the production possibility frontier (PPF) in a two plane model. Note the economic implications of the downward slope and the bowed-out shape of the PPF curve. Also, note the meaning of producing on the curve versus inside the curve. Lastly, think about what it means to move along the curve

2.1 Factors of Production

LEARNING OBJECTIVES

  1. Define the three factors of production – labor, capital, and natural resources.
  2. Explain the role of technology and entrepreneurs in the utilization of the economy's factors of production.

Choices concerning what goods and services to produce are choices about an economy's use of its factors of production, the resources available to it for the production of goods and services. The value, or satisfaction, that people derive from the goods and services they consume and the activities they pursue is called utility. Ultimately, then, an economy's factors of production create utility; they serve the interests of people.

The factors of production in an economy are its labor, capital, and natural resources. Labor is the human effort that can be applied to the production of goods and services. People who are employed – or are available to be – are considered part of the labor available to the economy. Capital is a factor of production that has been produced for use in the production of other goods and services. Office buildings, machinery, and tools are examples of capital. Natural resources are the resources of nature that can be used for the production of goods and services.

In the next three sections, we will take a closer look at the factors of production we use to produce the goods and services we consume. The three basic building blocks of labor, capital, and natural resources may be used in different ways to produce different goods and services, but they still lie at the core of production. We will then look at the roles played by technology and entrepreneurs in putting these factors of production to work. As economists began to grapple with the problems of scarcity, choice, and opportunity cost more than two centuries ago, they focused on these concepts, just as they are likely to do two centuries hence.


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