Economics explained
Category:
Basic economic ideas
Charactheristics of money and barter
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The central economic problem is that of scarcity. Given that there is a limited supply of factors of production, it is impossible to provide everybody with everything they want. Potential demands exceed potential supplies.
Factors of production are the inputs into the production of goods and services. The four factors of production are:
Land
This factor is the natural resource.
Examples: Surface of the earth, lakes, rivers, forests or the area of land that makes up a farm or factory.
The reward for owning land is the income that is generated.
Labour
This factor is the human resource
The basic determinant of which is the nation’s population.
The reward for labour is the wage or salary that is paid.
Capital
This factor is any man-made aid to production.
Capital consists of all those inputs that have each had to be produced in the first place.
Capital goods help land and labour produce more units of output – they improve the output from land and labour.
Examples: factories, machines, transportation and other equipment.
The reward to capital is the rate of return that is earned. These three factors are organised into units of production by firms.
Entrepreneur
This factor carries out two functions.
Enterprise:
organises the other three factors of production.
involves taking the risk of production
The return for enterprise is the profits that are made.