Mr. Kraus Economics Factors of Production and You

Key Assumptions in Economics People are rationally self-interested – They seek to maximize their utility (happy points) People generally make decisions at the margin – They weigh the marginal benefit against the marginal cost of a decision Ceteris Paribus – Economists hold factors constant, except for what’s being considered

Resources a.k.a. The Factors of Production Economists classify resources into 4 categories 1.Land Natural resources The payment for Land is RENT 2.Labor Human resources The payment for Labor is WAGES 3.Capital (a product of Investment) Tools, machines, factories The payment for Capital is INTEREST 4.Entrepreneurship The special ability of risk-takers to combine land, labor and capital in new ways in order to make profit The payment for Entrepreneurship is PROFIT

Check for Understanding Now that you know these terms, let’s see if we can use them to solve sort these factors. At the top of a paper write Natural Resources, Human Resources and Capital Goods. Place these items under the correct heading. Delivery Truck Teacher Factory Tree ATM machine Bushel of corn River Hair stylist Gold Barrel of oil Do we all agree on the placement of these items?

Factors cont’d Let’s consider some other questions about productive resources. Are the factors interdependent? (In other words, do the factors affect one another?) Land is considered a “passive” factor. Why? How do capital and labor differ from land?

Answer Key Natural Resources Tree Bushel of corn River Gold Barrel of oil Human Resources Teacher Hair stylist Doctor Farmer Factory worker Capital Goods Delivery truck Factory ATM machine Bulldozer Tractor

TANSTAAFL Illustrated: The PPC The PPC = The Production Possibilities Curve The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.

TANSTAAFL Illustrated: The PPC