Lesson 1.02 The Factors of Production

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Regardless of the product a business produces, each entrepreneur will need a share of the world's limited land, labor, and capital resources. Watch Productive Resources (1:52) to learn more about the factors of production. Take the quiz at the end to check your understanding.

Remember that since resources are limited, people, businesses, and governments must now decide how to use their resources wisely. When everyone understands the economic problem of scarcity they usually make wiser choices.

For instance, a student only has so many hours in a day. It is extremely hard to work a lot of hours to make money, and at the same time study enough to get the best grades.

A business that understands the problem realizes they only have so many labor, land and capital resources. The decisions that businesses make on how best to use those resources to provide the goods and services people want help determine whether a business is successful or not.

A country, knowing that its resources are limited, but having many things they want to do for their people, realize that tough decisions must be made on what the government can and cannot do.

By using marginal analysis, people will try to get the most for their money, businesses will try to make the most profit, and elected officials will make the decisions that will provide the most benefit to the nation. In the next two sections we will see how limited our resources are, and the costs associated with decisions. Everyone will become a better decision maker when they truly understand the problem of scarcity.

Read Marginal Analysis - Thinking at the Margin to learn about marginal analysis.

Any discussion about resources must include a discussion about money. Money is not a resource. Money simply takes the place of the barter system. You can trade your labor for cash instead of the product the company makes. In this way you can take your money and purchase the goods and services you desire. You'll learn more about money later. For now it is important to realize that money is not a resource or factor of production.