section 1 Scarcity and the Factors of Production OBJECTIVES ECONOMIC DICTIONARY GCG estor 1. Explain why scarcity and choice As you read the section, look for the 2) SN aS eH “Seca Sea gona ee Her ceitiunens 2. Doser reg me “e. o a Economic choices? 3. Define the three factors of want ‘* capital production and the diferences + goods + physical capitak between physical and human. * services: ‘* human capital capital. « soaroky, ‘Needs and Wants 4, Explain how scarcity affects the « economics pee: factors of production. . ¥ 7 pr shortage Bamps: + entrepreneur + factors of ‘production sland » Economics and You There are so many ways you could spend your money. You really want that new video game. You also want to attend an upcoming concert, At the same time, you need to pay your car insurance. With limited funds, you can’t have it all. How will you choose? ‘What's true for you is also true for your neighbors, your school, the gas station on the corner, a major television network, and the U.S. Congress. Economics is the study of how individuals, businesses, and governments make choices when faced with a limited supply of resources. rinciples in Action Scarcity forces us all to make choices by making us decide which options are most important to us. In this section, you will examine the problem of scarcity as it relates to such varied resources as water and the ingredients needed to make a plate of French fries. need something ‘essential for survival want something that ‘ . people dese but that Scarcity and Choice eet ecmeoay The study of economics begins with the fact that people cannot have everything they need and want. A need is something essential for survival such as food or medical care. A want is something that we desire but that goods the physical is not necessary for survival, such as video games or stylish haircuts. ccs tek eonace People satisfy their needs and wants with goods and services. Goods are Physical objects that someone produces, such as food, clothing, or video an e : s services the actions or games. Services are actions or activities that one person performs for Syne wet ee posen another. Medical care and haircuts are services. performs for another Visual Glos: Action Graph, How the Economy Works ‘(online ry ‘@nliney ~ @niiney - Go to the Visual Glossary Go to Action Graph Online Go to How the Economy Works Online for an interactive review for animated versions of key Online for an interactive lesson f opportunity cost. ‘charts and graphs. (on the role of the entrepreneur.How the Economy Works What does an entrepreneur do? ‘Allentrepreneurs—whether they are starting a lawn-mowing ‘service or founding a company that makes cars—have two things in common. First, they recognize a need or want. ‘Then, they must assemble the factors of production to mest that need or want. PEOPLE WANT [A SNACK THAT 15: BOTH TASTY AND HEALTHY. Anew business starts with an idea Kelly recognizes something her town needs and ‘does not have. scarcity the principle that bites amounts of goods and servicos ‘are avaiable to mest unlimited wants ‘economies tho study ‘of how people cook to satisty ther needs ‘and wants by making choices shortage a situation want mare ofa good or ‘service than producers ‘10 wiliag to make ‘avaliable at 2 particular price Recognize a Need or Want WHAT IF | OPENED A SNACK BAR THAT SERVED FRUIT ‘AND=YOUURT swoorhies? The Problem of Limits People’s needs and wants are unlimited. ‘When one want is satisfied, others arise. After eating lunch, you might want to go to a movie or buy some clothes. Goods and services, however, are limited. No one can have an endless supply of anything. Sooner ot later, a limit is always reached. ‘The fact that limited amounts of goods and services are available to meet unlim- ited wants is called scarcity. ‘At many different levels, scarcity forces people to make choices. You, for example, have to decide how to spend your time. If you decide to study for a test, you cannot go to the mall or do volunteer work at the same time, A store must choose berween hiring ten new workers or paying for more advertising to attract new customers. A city council might debate whether to use its money to fix an aging school building or to hire more firefighters. 4 WHAT Is ECONOMICS? Bi Katy begins to pull together the factors of production she needs to tun her Assemble Factors of Production Labor: people ‘todo the work Economies is the study of how people seek to satisfy their needs and wants by making choices. Because people act individually, in groups (such as businesses), and through governments, economists study all three. Scarcity Versus Shortage Scarcity is not the same thing as shortage. ‘A shortage occurs when consumers want more of a good or service than producers are willing to make available ata particular price. (You will learn how shortages are related to price in Chapter 6.) Shortages may be temporary or long-term. Unlike shortages, scarcity always exists. There simply are not enough goods and services to supply all of society's needs and wants. This is because the resources that go into making those goods and services are themselves scarce. (OY eHECKPOINT What is the main focus of ‘economics?How the Economy Works ais —$ For an animated, interactive version of Capital: human-made, Kelly took a financial risk by opening her own business. I the risk pays off, Kelly gets profits...her Workers get wages.. her customers get a healthy snack, Human Capital: acquired knowledge and skils nomen Capital: objects to create goods oro Tal ppty senicos Check Your Understanding 1. How will reading and other types of self-education help this entrepreneur ‘succeed? 2. What impact does the concept of scarcity have ‘on the decisions made by an entrepreneur? Provide Goods or Services Entrepreneurs and the Factors of Production How are scarce resources turned into goods and services? Entrepreneurs play a key role. Entrepreneurs are people who. decide how to combine resources to create new goods and services. To make a profit, Land Economists use the term land to refer to all natural resources used to produce goods and services, Natural resources are any materials found in nature that people use to make things or to provide services. ‘These resources include fertile land for ‘entrepreneur 2 person who decides how to ‘combine resources [Link] goods and cnereprencurs are willing to take risks, *™ing, a8 well as resources found in or stews They develop new ideas, start businesses, 08 the land such as oil, iron, coal, water, create industries, and fuel growth. and forests. factors of production Anyone who opens a business, large or the osources that re small, is an entrepreneur. Jean-Baptiste Say, raid ieee a. Sees an eghteenth-century. Eteach egonomist, The second factor of production is labor. thought the risk-taking entrepreneur. so L@00" is the effort people devote to tasks important that he should be considered 2 ~f0r which they are paid. Labor includes tandatnatual fourth factor of production. the medical care provided by a doctor, 010 used to The first task facing an entrepreneur the classroom instruction provided by a Sirage 9" is to assemble factors of production, or teacher, and the tightening of a bolt by the resources used to make all goods and an assembly-line worker. Labor is also an services, The three main factors of produc- _artist’s creation of a painting or a techni- [@b8F-e stor people tion are land, labor, and capital. cian’s repair of a television. ‘they are paid CHAPTER! SECTION) &‘capital any human made resource that is used to produce other ‘goods and services: physical capital the human-made objects Used to create other ‘goods and services ‘human capital the knowledge and kis a worker gains through eduction and ‘experience Capital ‘The termeapital refers to any human-made resource that is used to produce other goods and services. Economists divide capital into two types—physical capital and human capital. Human-made objects used to create other goods and services are physical capital. (Sometimes economists use the term capital goods for physical capital.) The buildings that house a computer manufacturing company are physical capital as are all the equipment and tools needed to make those computers. In addition to producing physical capital, people can also invest in themselves. The PATE Population With Sustainable Access to an Improved Water Source (Percentage) 2004 < + United | States 100%, eee Egypt >< ae ae = india china 98% _ 86% 4 = a) Haiti Nigeria New Guinea © WHAT Is ECONOMICS? knowledge and skills a worker gains through education and experience is human capital. Computer designers go to college to study engineering, electronics, and computers. They build their human capital, making it possible for them to ddesign and build faster and more powerful ‘computers, Auto mechanics also increase their human capital through schooling and ‘experience. This knowledge gives them the skills to diagnose and fix an engine that is not running properly. ‘An economy requires both physical and human capital to produce goods and services. Doctors need both stethoscopes and schooling to provide healthcare. ‘Assembly-line workers use tools as well as their own skills acquired through training and practice, Benefits of Capital Capital is a key factor of production because people and companies can use it to save a great deal of time and money. Physical capital such as machines and tools help workers produce goods and services more easily and at less cost. ‘As a result, they become more produc- tive. Human capital such as technical knowledge has the same result, The more skills a worker gains, the more produc- tive he or she becomes. Many businesses provide training for their employees for this reason. To understand the benefit of investing in capital, consider the following example. ‘A family of six people washes dishes by hand after every meal—breakfast, lunch, and dinner. That is a total of 21 meals per week. It takes 30 minutes per meal for two family members working together to scrape, stack, wash, rinse, dry, and put away the dishes, As a result, the family spends 21 hours a week cleaning dishes— time that could have been spent on other more produetive activities. Now, suppose that the family saves up and spends $400 on some physical capital—a dishwasher. Using the dish- washer, it takes only one family member 15 minutes after each meal to stack the dishwasher and another family member 15 minutes at the end of the day to put thedishes away. A chore that used to require 21 hours to complete now takes only 7 hours. This example shows the typical benefits of using capital: 1, Extra time The family saves 14 hours a week. This is time that can be used for other activities. 2, More knowledge By learning how to use the dishwasher, family members learn more about using household appliances in general. They can apply that knowledge to using washing machines, dryers, and other appliances. 3. More productivity With extra time and more knowledge, family members can use their resources and labor to do other chores, to learn other skills, or simply to enjoy themselves. Every member of the family benefits. (CHECKPOINT What are the factors of production? Scarce Resources All goods and services are scarce because the resources used to produce them are scarce. Consider French fries. A typical portion of French fries might have started as potatoes in a field in Idaho. Ten gallons of water irrigated the half-foot plot where SECTION 1 ASSESSMENT QExiding Question 1. Use your completed cause-and- cffect chart to answer this question: How does soarity force people to make economic choices? 2. Extension Describe how scatity of time, money, or resources affected a Key Terms and Main Ideas 3, What isthe difference between ‘goods and services? How does searcity differ from @ shortage? What doos an entrepreneur do? What is a benefit of using both Physical capital and human capital? Critical Thinking 7. Classify Identify the factor of pro- ‘duction represented by each af the following: (a) fishing waters, (6) an office building, (c) clerks in a store, {(@) a tractor, (e) a student in a cook- ing school. Explain, recent economic decision you made, _8- Infer if companies can become: ‘more productive by increasing thelr physical capital, why would a com pany not buy up-to-date computers for all employees each year? 9. Apply Think of a good or service that you consumed today. List at least five factors of production used ‘to produce that good or service, Inciude at least one example each of land, labor, and capital the potatoes grew. Nurtured with fertil- izers and protected by pesticides, the potatoes grew until they were harvested, processed, frozen, and then transported to Seattle. There they were fried in corn oil from Nebraska, sprinkled with salt from Louisiana, and eaten in a restaurant. All of the factors of production used to produce those French fries are scarce, First, the amount of land and water available for growing potatoes is limited. Second, the labor available to grow the crop and to harvest, process, transport, and cook the potatoes is limited by the size, time, age, and energy of the population. Finally, the amount of physical capital available to create the French fries, such as farm machines or cooking equipment, is also limited. The same principles apply to a pair of blue jeans, an MP3 player, or a space shuttle. No matter what good or service we look at, the supplies of land, labor, and capital used to produce it are scarce. We would also notice another fact about those resources—each one has many alternative uses. Individuals, businesses, and govern- ments have to choose which alternative they most want. (Q/eMECKPOINT Why are goods and 9 services scarce? To continue to bull @ response to the Essential Essential nations oe oot yor Essential Questions Journal Quick Write [Link] at the How the Economy Works feature in this section. Make a list ofthe risks an entrepreneur takes, ‘and the possible rewards he or she ‘might gain. Then, write a brief para- ‘graph explaining why entrepreneurs: are important to the economy of a community or nation. SECTION? 7