Factors of Production HOW ARE GOODS PRODUCED Factors

Factors of Production

HOW ARE GOODS PRODUCED? Factors of production The productive resources used to produce goods and services. Factors of production are grouped into four categories: • Land (Natural Resources) • Labor (Human Resources) • Capital • Entrepreneurship

HOW ARE GOODS PRODUCED? Land o. What Raw materials are needed to produce your product? o. The “gifts of nature” that we use to produce goods and services. All the things we call natural resources. o. Comes from the air, water, or the earth o. Land, minerals, water • Renewable SOURCES o. Water, air growing things • Non-Renewable SOURCES o. Coal, oil

Factor 1: Natural Resources • Nature supplies raw materials necessary to make things • These raw materials are called Natural Resources –Example: Chicken noodle soup contains chicken meat, spices, water, and vegetables, all of which came from the nature

HOW ARE GOODS PRODUCED? Labor • What will your employees have to do to create your product? • What work will need to be done to turn your raw material into your finished product o Work time and work effort that people devote to producing goods and services • People’s efforts, labor • Effort can be physical or mental

Factor 2: Human Labor • Human effort used to produce goods and services is called labor • Labor can be physical or mental • Example: to the soup, farmers raise the animals and crops, a truck driver drives them to a factory, and workers operate machinery to mix and can it (physical labor) • Someone has to design the machines, and think of a recipe for the soup (mental labor)

HOW ARE GOODS PRODUCED? o Capital o equipment and people will you need to create your product o Physical capital: What tools, machines and factories will you needed to create your product o Financial capital: funds the firm use to buy physical capital

Factor 3: Capital Resources • Producing goods and services requires tools and equipment • The buildings, machines, supplies, etc. used to produce are called capital resources, or capital goods • Examples: the truck used to drive to the factory, the machines used to can the soup, and the factory building itself

HOW ARE GOODS PRODUCED? o Entrepreneurship o The human resource (PEOPLE) that organized and combines labor, land, capital. • The quantity and quality of entrepreneurship is hard to describe and measure. • But we can easily recognize brilliant entrepreneurs by their enormous financial success. o Sam Walton (Wal-Mart), Bill Gates (Microsoft), and Michael Dell (Dell Computers) are examples of outstanding entrepreneur's.

Influences on Entrepreneurs Decision Making • To realize a profit, produce good/service at a cost lower than the market price for the good or service. • Profit is the money left over from selling a good or service after the cost of buying productive resources have been paid. o Minimize the use of scarce resource in production o Maximize the productivity of the factors used in production to keep cost as low as possible.

Entrepreneurship: The 4 th Factor • Making the other 3 factors of production into something useful often takes creativity and some risk • Entrepreneurship is the factor of production that ties the others together • Examples: Someone has to decide what to name the soup, where to sell it, and how much to charge

STOP AND THINK If you started your own business what would it be? What are some of the 4 Factors of production you would need. § 2 examples for each Land Labor Capit al Entrepreneur

DEMAND SUPPLY

What is “supply and demand”? • Supply and demand is how economists track the dividing of resources & their value within a society • Two (2) goals: – How much of a product do we have? – Is the demand for that product strong?

What is the “law of demand”? • The Law of Demand asks: “What is the willingness of consumers to buy a product at a certain price? ” – The demand of a good is greatest for consumers when the price is low.

Demand Curve Price per XBox D $500 A B $450 C 400 E 350 F 300 G 250 H 200 0 D 45 50 55 60 65 70 75 Quantity Demanded in Billions of Xboxes per Year Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

What are the factors that determine “demand”? – – – Price of other goods (substitute or complementary) Income levels Customer Taste and preferences Fashion Outlook (consumer expectation of the future)

What is the “law of supply”? • The Law of Supply asks: “How much of a good or service is a company willing to produce at a certain price? ” • If nothing changes, a company will produce a greater quantity of products when the price for that good is high.

Supply Curve for Xbox 360 a $500 S b Price per Xbox 450 c 400 e 350 f 300 g 250 200 0 h S 30 40 50 60 70 80 90 Quantity Supplied in Billions of Xboxes per Year Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

What are the factors that determine “supply”? – Price – Costs of Production (workers, machines, and/or assembly) – Natural Conditions (Change in the price of materials needed to make the good) – Government Actions (Subsidies, Taxes, and Regulations) – – Technology (Improvements in machines and production) Outputs (Price changes in other products) Expectations (outlook of the future) Size of Industry (Number of companies in the industry)

Point of Equilibrium