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

Case in Point: Technology Cuts Costs, Boosts Productivity, Profits, and Utility

Technology can seem an abstract force in the economy – important, but invisible.

It is not invisible to the 130 people who work on a Shell Oil Company oil rig called Mars, located in the deep waters of the Gulf of Mexico, about 160 miles southwest of Pensacola, Florida. The name Mars reflects its otherworld appearance – it extends 300 feet above the water's surface and has steel tendons that reach 3,000 feet down to extract the Gulf's oil deposits. This facility would not exist if it were not for the development of better oil discovery methods that include three-dimensional seismic mapping techniques, satellites that locate oil from space, and drills that can make turns as drilling foremen steer them by monitoring them on computer screens from the comfort of Mars. "We don't hit as many dry holes," commented Shell manager Miles Barrett. As a result of these new technologies, over the past two decades, the cost of discovering a barrel of oil dropped from $20 to under $5. And the technologies continue to improve. Three-dimensional surveys are being replaced with four-dimensional ones that allow geologists to see how the oil fields change over time.

The Mars project was destroyed by Hurricane Katrina in 2005. Royal Dutch Shell completed repairs in 2006, at a cost of $200 million. But the facility is again pumping 130,000 barrels of oil per day and 150 million cubic feet of natural gas, the energy equivalent of an additional 26,000 barrels of oil. Shell announced a new Mars-like project, Mars B Olympus, in 2010. The second Mars hub will be located 100 miles south of New Orleans and is expected to begin production in 2015.

Technology is doing more than helping energy companies track oil deposits. It is changing the way soft drinks and other grocery items are delivered to retail stores. For example, when a PepsiCo delivery driver arrives at a 7-Eleven, the driver keys into a handheld computer the store's inventory of soft drinks, chips, and other PepsiCo products. The information is transmitted to a main computer at the warehouse that begins processing the next order for that store. The result is that the driver can visit more stores in a day and PepsiCo can cover a given territory with fewer drivers and trucks.

New technology is even helping to produce more milk from cows. Ed Larsen, who owns a 1,200-cow dairy farm in Wisconsin, never gets up before dawn to milk the cows, the way he did as a boy. Rather, the cows are hooked up to electronic milkers. Computers measure each cow's output, and cows producing little milk are sent to a "hospital wing" for treatment. With the help of such technology, as well as better feed, today's dairy cows produce 50% more milk than did cows roughly 20 years ago. Even though the number of dairy cows in the United States in the last 20 years has fallen 17%, milk output has increased 25%.

Who benefits from technological progress? Consumers gain from lower prices and better service. Workers gain: Their greater ability to produce goods and services translates into higher wages. And firms gain: Lower production costs mean higher profits. Of course, some people lose as technology advances. Some jobs are eliminated, and some firms find their services are no longer needed. One can argue about whether particular technological changes have improved our lives, but they have clearly made – and will continue to make – them far different.