The Factors of Production

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Land includes the "gifts of nature," or natural resources not created by human effort.



Capital includes the tools, equipment, and factories used in production.



Labor includes people with all their efforts and abilities.

Figure 1.2

Entrepreneurs are individuals who start a new business or bring a product to market.

Synthesizing Information The four factors of production are necessary for production to take place. What four factors of production are necessary to bring jewelry to consumers?

Capital is unique in that it is the result of production. A bulldozer, for example, is a capital good used in construction. It also was built in a factory, which makes it the result of earlier production. Like the bulldozer, the cash register in a neighborhood store is a capital good, as are the computers in your school that are used to produce the service of education.


A third factor of production is labor-people with all their efforts, abilities, and skills. This category includes all people except for a unique group of individuals called entrepreneurs, which we single out because of their special role in the economy.

Unlike land, labor is a resource that may vary in size over time. Historically, factors such as population growth, immigration, famine, war, and disease have had a dramatic impact on both the quantity and quality of labor.


Some people are special because they are the innovators responsible for much of the change in our economy. Such an individual is an entrepreneur, a risk-taker in search of profits who does something new with existing resources. Entrepreneurs often are thought of as being the driving force in an economy because they exhibit the ability to start new businesses or bring new products to market. They provide the initiative that combines the resources of land, labor, and capital into new products.


When all factors of production-land, capital, labor, and entrepreneurs-are present, production, or the process of creating goods and services, can take place. In fact, everything we produce requires these factors. For example, the chalkboards, desks, and audiovisual equipment used in schools are capital goods. The labor is in the form of services supplied


by teachers, administrators, and other employees. Land, such as the iron ore, granite, and timber used to make the building and desks, as well as the land where the school is located, is also needed. Finally, entrepreneurs are needed to organize the other three factors and make sure that everything gets done.

The Scope of Economics

Economics is the study of human efforts to satisfy what appear to be unlimited and competing wants through the careful use of relatively scarce resources. As such, it is a social science because it deals with the behavior of people as they deal with this basic issue. There are four key elements to this study: description, analysis, explanation, and prediction.


Economics deals with the description of economic activity. For example, you will often hear about the Gross Domestic Product (GDP)-the

United States Leads in Entrepreneurs

A vast majority of the owners of the nearly 20 million businesses in the United States are entrepreneurs. Most either work for themselves or have a few employees.

dollar value of all final goods and services, and structures produced within a country's borders in a 12-month period. GDP is the most comprehensive measure of a country's total output and is a key measure of the nation's economic health. Economics is also concerned with what is produced and who gets how much, as well as with topics such as unemployment, inflation, international trade, the interaction of business and labor, and the effects of government spending and taxes.

Description is important because we need to know what the world around us looks like. However, description is only part of the picture because it leaves many important "why" and "how" questions unanswered.


In order to answer such questions, economics must focus on the analysis of economic activity as well. Why, for example, are prices of some items high while others are low? Why do some people earn higher incomes than others? How do taxes affect people's desire to work and save?

Italy 11 Britain nm

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Germany Denmark ¡Ï France 11 Finland




Canada I


Source: 1999 Global Entrepreneurship Monitor

Source: 1999 Global Entrepreneurship Monitor

A 10-nation study found that the United States leads when it comes to entrepreneurs. According to the survey, nearly 1 in 12 Americans is trying to start a new business. In second place is Canada. The study also shows a strong link between business start-up rates and overall economic growth. The graph shows the percentage of the adult population starting new businesses.

Critical Thinking

1. Analyzing Information In which nation is entrepreneurial activity strongest? Weakest?

2. Making Comparisons How does the level of North America's entrepreneurial activity compare with Europe's?

3. Drawing Conclusions Do you think there is a link between business start-up rates and overall economic growth? Why or why not?



"Capital" comprises the tools, equipment, and factories used to produce goods and services. As the economy changes, some economists are adjusting the definition to include "tools" such as knowledge and intellectual property. An example of such knowledge and intellectual property are databases and software.

The importance of analysis is that it helps us to discover why things work and how things happen. This, in turn, will help us deal with problems that we would like to solve.


Economics is also concerned with the explanation of economic activity. After economists understand why and how things work, it is useful and even necessary to communicate this knowledge to others. If we all have a common understanding of the way our economy works, some economic problems will be much easier to address or even fix in the future. When it comes to the GDP, you will soon discover that economists spend much of their time explaining why the measure is, or is not, performing in the manner expected.


Finally, economics is concerned with prediction. For example, we may want to know if people's incomes are going to rise or fall in the future, affecting their spending habits in the marketplace. Or, perhaps a community trying to choose between higher taxes on homeowners or higher taxes on businesses needs to know the consequences of each alternative before it makes its choice.

The study of economics can help to make the best decision in both situations. Because economics deals with the study of what is, or what tends to be, it can help predict what may happen in the future, as well as the likely consequences of different courses of action.

Finally, it is also important to realize that the actual decisions about the economic choices to be made are the responsibility of all citizens in a free and democratic society. Therefore, the study of economics helps all of us to become more informed citizens and better decision makers.

Checking for Understanding

1. Main Idea Using your notes from the graphic organizer activity on page 5, explain why a society must face the choices about WHAT, HOW, and FOR WHOM to produce.

2. Key Terms Define scarcity, economics, need, want, factors of production, land, capital, financial capital, labor, entrepreneur, production, Gross Domestic Product (GDP)

3. Describe the fundamental economic problem.

4. List the three basic economic questions every society must answer.

5. Describe the factors of production.

6. List the four key elements of economics.

Applying Economic Concepts 7. Scarcity How does scarcity affect your life? Provide several examples of items you had to do without because of limited resources. Explain how you adjusted to this situation. For example, were you able to substitute other items for those you could not have?

*Critk(tl Thinking

8. Synthesizing Information Give an example of a supposedly "free" item that you see every day. Explain why the item is not really free by stating who or what actually pays for it.

Practice and assess key social studies skills with the Glencoe Skillbuilder Interactive Workbook, Level 2.



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  • anthony
    What four factors of production are necessary to bring jewelry to consumers?
    4 years ago
  • Regina
    What factor or production is thought of as the driving force in the economy and why?
    3 years ago
  • Nicla
    What factor in production is thought of as the driving force in the economy rhayden?
    3 years ago
  • maarit ruoho
    What 4 factors of production are necessary to bring jewelery to the consumer?
    3 years ago
  • ulrike
    What four factors of production are necessary to bring jewellary to the consumer?
    3 years ago

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