Factors of Production

1
Factors of Production

• Material Resources
• Land
• Physical Capital

• Human Resources
• Labor
• Entrepreneurship

2
Returns to Owners of Factors of Production

• Land Owners - payment called RENT.
• Capital (Financial) Owners - payment called
  INTEREST.
• Labor Owners - payment called WAGES.
• Entrepreneurs - payment (or potential payment) is
  PROFIT.

3
Goals of An Economic System

• Efficiency
• Equity
• Stability
• Growth

4
ProductionPossibilities Curve (PPC)

• A model to portray a simple society.
• Basic Assumptions of Model
• Two goods
• Common resources
• Fixed conditions
• Full employment

5
Production Possibilities
Only defensegoods produced
Defense Goods
A1
200
G1
Impossible
B1
175
150
Efficient Combinations
C1
F1
125
Underutilized (Inefficient)
100
Only nondefense goods produced
75
D1
E1
0
150
125
Nondefense Goods
75
25
50
100
6
Production Possibilities Table
?
7
Law of Increasing Opportunity Costs

• The opportunity cost of additional units of a
  good generally increases as society attempts to
  produce more of that good.
• This accounts for the bowed-out shape of the
  production possibilities curve.

Trade-offs and Tsunami Relief
More funds for tsunami relief meant less funds
for other charities.
8
Production Possibilities Frontiers and Real-world
Trade-offs
Economic Growth The ability of the economy to
produce increasing quantities of goods and
services.
Economic Growth
9
The Market System

• Private Property
• Freedom of Enterprise
• Freedom of Choice

10
The Market System
Characteristics

• Self-Interest
• Competition
• Markets and Prices
• Technology and Capital Goods
• Specialization
• Division of Labor
• Use of Money
• Medium of exchange
• Barter
• Active but Limited Government

11
The Market System
Five Fundamental Questions

• What Goods Will Be Produced?
• Consumer Sovereignty
• Dollar Votes
• How Will the Goods Be Produced?
• Available Technology
• Prices of Needed Resources

12
The Market System
Five Fundamental Questions

• Who Will Get the Output?
• How Will the System Accommodate Change?
• How Will the System Promote Progress?
• Technological Advance
• Creative Destruction
• Capital Accumulation

13
The Market System
Demise of Command Systems
East Germany
USSR
Yugoslavia

• Two Insurmountable Problems
• The Coordination Problem
• The Incentive Problem

14
Circular Flow
Resource Market
Money Income
Costs
Input Factors
Resources
Businesses
Households
Goods Services
Goods Services
Product Market
Consumption
Revenue