Economics: Another Perspective, Factors of Production

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Microeconomics ECO402

Lesson 2

Economics; Another Perspective

Economics is the study of the choices made by people who are faced with scarcity.

Scarcity is a situation in which resources are limited but can be used in different ways;

so one good or service must be sacrificed for another.

Society's Choices

The decisions of producers, consumers and government determine how an economic

system answers three fundamental questions:

1. What products do we produce?

2. How do we produce these products?

3. Who consumes the products?

Factors of Production

Factors of production are the resources that are used to produce goods and services:

1. Natural resources:

The things created by acts of nature such as land, water, mineral, oil and gas

deposits, renewable and nonrenewable resources.

2. Labor:

The human effort, physical and mental, used by workers in the production of goods

and services.

3. Physical capital.

All the machines, buildings, equipment, roads and other objects made by human

beings to produce goods and services.

4. Human capital:

The knowledge and skills acquired by a worker through education and experience.

5. Entrepreneurship:

The effort to coordinate the production and sale of goods and services.

Entrepreneurs take risk and commit time and money to a business without any

guarantee of profit.

The Production Possibilities Frontier

(PPF)

The PPF curve shows the possible

combinations of goods and services

available to an economy, given that all

productive resources are fully and efficiently

employed.

When the economy is at point i, resources

are not fully employed and/or they are not

used efficiently. Point g is desirable because

it yields more of both goods, but not

attainable given the amount of resources

available. Point d is one of the possible

combinations of goods produced when

resources are fully and efficiently employed.

Microeconomics ECO402

Scarcity and the PPF

To increase the amount of farm goods by

10 tons, we must sacrifice 100 tons of

factory goods.

The PPF curve is bowed out because

resources are not perfectly adaptable to the

production of the two goods. As we

increase the production of one good, we

sacrifice progressively more of the other.

Shifting the PPF Curve

To increase the production of one good

without decreasing the production of the

other, the PPF curve must shift outward.

The PPF curve shifts outward as a result of

an increase in the economy's resources OR

a technological innovation that increases

the output obtained from a given amount of

resources. From point d, an additional 200

tons of factory goods or 20 tons of farm

goods are now possible (or any

combination in between).

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