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


  • Factors of production are the resources the economy has available to produce goods and services.
  • Labor is the human effort that can be applied to the production of goods and services. Labor's contribution to an economy's output of goods and services can be increased either by increasing the quantity of labor or by increasing human capital.
  • Capital is a factor of production that has been produced for use in the production of other goods and services.
  • Natural resources are those things found in nature that can be used for the production of goods and services.
  • Two keys to the utilization of an economy's factors of production are technology and, in the case of a market economic system, the efforts of entrepreneurs.