Factors of Production

What to do with the fundamental economic problem of scarcity?

Three Basic Questions

In order to solve the problem of scarcity, economists must attempt to answer three basic questions.

What?

How?

For Whom?

What must we Produce?

 Society must choose based on its needs

How to Produce?

 Society must choose based on its resources

For Whom to Produce?

 Society must choose based on its population and other available markets

Technology has fundamentally changed how we live. “I want my MTV”…and my refrigerator, color tv, and microwave oven.

Which group of people ultimately determines the products that a free enterprise economy produces?

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Congress Local government property owners consumers

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Factors of Production

 Once a society is ready to work on answering the three basic questions, they must then turn to their available factors of production (the resources needed to produce what people want and need).

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The society’s limited natural resources

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Landforms

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Minerals

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Vegetation Animal life Climate

Capital

 The means by which something is produced  Money     Tools Equipment Machinery Factories Capital Goods - Any tangible assets that an organization uses to produce goods or services such as office buildings, equipment and machinery.

Labor (Human Resources)

 The workers who apply their efforts, abilities, and skills to production  Physical Abilities  Mental Abilities

Entrepreneurship

 Risk-takers who combine the land, labor, and capital into new products  Makes basic business policy decisions   Innovator for new products, production techniques, organizational forms Bears the risk of time, effort, and funds

Production

 Creating goods and services—the result of land, capital, labor, and entrepreneurs

Bill Gates

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Capital Land Labor Entrepreneurship

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Factory

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Land Labor Capital Entrepreneurship

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Iron Ore

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Land Labor Capital Entrepreneurship

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Assembly line worker

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Land Labor Entrepreneurship Capital

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Capitalism is a competitive economic system in which private citizens own the factors of production.

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True False

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The entrepreneur organizes land, capital, and labor for production in hopes of earning a profit.

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True False

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