Transcript Document

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Factors of production are resource inputs
used to produce goods and services. These
are:
◦ Land
◦ Labor
◦ Capital
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Land refers to all natural resources such as
crude oil, water, air, climate, sea coasts and
minerals.
◦ It is not just the ground or exploitable minerals
below it.
◦ Land is nature’s bounty. The US is very rich in land.
The country of Chad is very poor, despite having
some oil reserves.
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Labor refers to the human contribution to
the production process. It includes both
quantity and quality.
The quantity of labor is the size of the labor
force.
The quality of depends upon its skills and
abilities to produce goods and services.
Building more skills and abilities requires
investing in people, building human capital.
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Physical Capital includes those goods which
we produce for use in the production of other
goods, i.e., our tools.
It also includes factories, roads and
transportation networks, communication
networks, whatever we produce that aids in
the production of other goods.
Human and Physical Capital require using
resources in order to obtain them. In
essence, investment.
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Technology is not exactly a factor of
production. It refers to the processes in which
resources are turned into goods and services.
The better the technology, the more goods
that can be produced from a given amount of
resources.
The potential level of production is just as
reliant on technology as the level of
resources.
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No matter how an economy is organized
there is a limit to how much can be produced.
The most evident limit is the amount of
resources available for producing goods and
services. Another is the level of technology.
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Scarcity is the cause of the choices we have to
make in production.
A resource has to be used in a certain
production. Allocation of resources is an
important part of creating efficient
production.
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Production possibilities frontiers (PPFs) are
the alternative combination of goods and
services that could be produced in an
economy in a given period of time. It depend
on the quantity and quality of available
resources, the level of technology and that
resources are used wisely.
PPFs are useful tools in demonstrating
important economic concepts.
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The Production Possibilities Graph is a
representation of all possible mixes of
production between two groups of goods.
Each point on the production possibilities
curve depicts an alternative mix of output, all
of them efficient.
The curve shows the efficient combinations.
OUTPUT OF SHOES
5
A
B
4
C
3
D
2
E
1
0
1
2
3
OUTPUT OF TELEVISIONS
4
5
F
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Scarce resources – there’s a limit to the
amount we can produce in a given time
period with available resources and
technology. This is demonstrated by the
inability to produce at a point outside the
curve
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Opportunity costs – we can obtain additional
quantities of any desired good only by
reducing the potential production of another
good.
As we move along the curve, the amount we
need to give up increases. This is called the
Law of diminishing returns
OUTPUT OF SHOES
5
A
Step 1: give up one shoe
B
4
3
2
Step 2: get two TVs
Step 3: give up another shoe
C
Step 4: get one more TV
D
E
1
0
1
2
3
OUTPUT OF TELEVISIONS
4
5
F
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Efficiency means getting the maximum output
of a good from the resources used in
production.
Every point on a production possibilities
curves is efficient.
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A production possibilities curves shows
potential output, not necessarily actual
output.
Production at inefficient quantities will be less
than at efficient quantities.
Inefficiency is represented by points inside the
production possibilities curve.
OUTPUT OF SHOES
5
A
4
B
3
Y
2
C
Inefficient
1
0
1
2
3
4
OUTPUT OF TELEVISIONS
5
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All output combinations that lie outside the
production possibilities curve are unattainable
with current resources and technology.
To produce outside the PPF, there must be
economic growth.
OUTPUT OF SHOES
5
A
X
Currently not attainable
B
4
C
3
2
1
0
1
2
3
4
OUTPUT OF TELEVISIONS
5
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Economic growth is an increase in output (real
GDP) — an expansion of production
possibilities. This results from an increase in
resources or the level of technology
OUTPUT OF SHOES
0
PP2
PP1
OUTPUT OF TELEVISIONS