ALLOCATION OF

RESOURCES
 Resources
Another name for ‘resources’ is ‘factors of
production’ or ‘factors’ for short.
Resources have the potential to produce goods
and services that are valued by society. For
example, a nation’s land and population are the
basis for determining agricultural output. The
accumulation of capital gradually permits output
to rise without more land and labour.
The factors of production are resources that are
the building blocks of the economy; they are
what people use to produce goods and services.
Economists divide the factors of production into
four categories: land, labor, capital, and
entrepreneurship.
 Factors of Production
 Land
 Labour
 Capital
 Entrepreneurship
land, labour and capital, there is entrepreneurial
ability. This term captures the risk-taking, profit-
seeking element in capitalism. The entrepreneur is the
individual or group of people who actually bear the
cost of bringing resources together in a production
function.
 Land
Land, defined to include mines, national parks,
deserts, fisheries and forests as well as
agricultural land, has three important
characteristics.
 Features of Land
 Firstly, it is fixed in location. This means that capital
and labour may be necessary (in the form of roads,
railways, houses, etc.) before land can be brought
into use in a production function.
 Secondly, the supply of land is virtually fixed. Short
of embarking on conquest or reclaiming land from
the sea-bed as in The Netherlands, a country has
only so much land. Again, capital and labour can
improve land or make it yield two crops rather than
one, but overall, land is given.
 Thirdly, land is not self-sustaining. Natural
forces are constantly at work eroding hills and
depositing the soil in valleys and deltas. Social,
political and economic forces also play a key
part in shaping the use of land. The quantity
and quality of agricultural land will invariably
decline unless society takes steps to
counteract the forces at work
 Labour
People are constantly entering the labour force
as they grow up or wish to earn money. Similarly
other people are leaving the labour force as they
grow old, become sick or decide they no longer
need to earn money. Those people in the labour
force are also continuously changing (working
longer or shorter hours, changing their skills,
moving from one firm to another and migrating,
for instance).
 • is rural population growing?
• are people moving from the countryside to towns?
• are the returns from labour in farming good (the returns
from farming or from wage labour)?
In many countries, women increasingly look for paid
work. Their success in finding it depends in part on the
social position of women and in part on there being
employers ready and able to hire them. Therefore, the
amount of labour willing and able to work at any one
time will depend on a number of considerations.
 Characteristics of Labour
• First, labor is considered to be heterogeneous, which refers to the
idea of how the efficiency and quality of work are different for
each person. It differs because it depends on an individual’s unique
skills, knowledge, motivation, work environment, and work
satisfaction.
• Additionally, labor is also perishable in nature, which means that
labor cannot be stored or saved up. If an employee does not work
a shift today, the time that is lost today cannot be recovered by
working another day.
• Also, another characteristic of labor is that it is strongly associated
with human efforts. It means that there are factors that play an
important role in labor, such as the flexibility of work schedules,
fair treatment of employees, and safe working conditions.
 Capital
Physical capital means capital goods, either
stocks of goods or of machinery and equipment.
The physical stock of capital tends to wear out
over time. It becomes physically worn and also
becomes obsolete. This loss of value over time is
called depreciation. Therefore to maintain the
stock of capital, replacement capital goods are
required every year.
 Features of Capital
• Capital is different from the first two factors because it
is created by humans. For example, capital goods like
machines and equipment are created by individuals, unlike
land and natural resources.
• Additionally, capital is also a factor that can last a long
time, but it depreciates in value over time. For example, a
building is a capital good that can endure for a long period
of time, but its value will diminish as the building gets older.
• Capital is also considered to be mobile because it can be
transported to different places, such as computers and
other equipment.
• A number of terms are used which may be confusing. The term
capital is also used to refer to financial capital: the funds and
other financial assets available for purchasing physical capital.
Our definition of capital is as 'physical capital'.
• Investment is the flow of new or replacement capital goods
per unit time that increases or maintains the stock of physical
capital. Gross investment includes both elements (new and
replacement) whilst net investment excludes replacement (so
net = new investment).
• Finally, fixed investment (sometimes called fixed capital
formation) is gross investment without any increase in stocks
of goods. Incidentally, stocks of goods are called inventories.
 Entrepreneurship
• Entrepreneurship as a factor of production is a
combination of the other three factors. Entrepreneurs
use land, labor, and capital in order to produce a good
or service for consumers.
• Entrepreneurship is involved with establishing
innovative ideas and putting that into action by
planning and organizing production. Entrepreneurs are
important because they are the ones taking the risk of
the business and identifying potential opportunities.
The income that entrepreneurs earn is called profit.
 Scarcity
• Our resources are limited. At any one time, we have only so much land, so
many factories, so much oil, so many people. But our wants, our desires for
the things that we can produce with those resources, are unlimited. We
would always like more and better housing, more and better education—
more and better of practically everything.
• If our resources were also unlimited, we could say yes to each of our wants
—and there would be no economics. Because our resources are limited,
we cannot say yes to everything. To say yes to one thing requires that we
say no to another. Whether we like it or not, we must make choices.
• Our unlimited wants are continually colliding with the limits of our
resources, forcing us to pick some activities and to reject others. Scarcity is
the condition of having to choose among alternatives. A scarce good is one
for which the choice of one alternative requires that another be given up.
• Suppose we have decided the land should be used for
housing. Should it be a large and expensive house or
several modest ones? Suppose it is to be a large and
expensive house. Who should live in the house? If the Lees
live in it, the Nguyens cannot. There are alternative uses of
the land both in the sense of the type of use and also in
the sense of who gets to use it. The fact that land is scarce
means that society must make choices concerning its use.
• Virtually everything is scarce. Consider the air we breathe,
which is available in huge quantity at no charge to us.
Could it possibly be scarce?
 The Fundamental Economic Questions

• What should be produced? Using the economy’s scarce resources to

produce one thing requires giving up another. Producing better education,
for example, may require cutting back on other services, such as health care.
A decision to preserve a wilderness area requires giving up other uses of the
land. Every society must decide what it will produce with its scarce resources.
• How should goods and services be produced? There are all sorts of choices
to be made in determining how goods and services should be produced.
Should a firm employ a few skilled or a lot of unskilled workers? Should it
produce in its own country or should it use foreign plants? Should
manufacturing firms use new or recycled raw materials to make their
products?
• For whom should goods and services be produced? If a good or service is
produced, a decision must be made about who will get it. A decision to have
one person or group receive a good or service usually means it will not be
available to someone else.
 What is Economics?
• Ultimately, economics is the study of choice. Because choices range over every
imaginable aspect of human experience, so does economics. Economists have
investigated the nature of family life, the arts, education, crime, sports, job
creation—the list is virtually endless because so much of our lives involves making
choices.
• How do individuals make choices: Would you like better grades? More time to
relax? More time watching movies? Getting better grades probably requires more
time studying, and perhaps less relaxation and entertainment. Not only must we
make choices as individuals, we must make choices as a society. Do we want a
cleaner environment? Faster economic growth? Both may be desirable, but efforts
to clean up the environment may conflict with faster economic growth. Society
must make choices.
• Economics is defined less by the subjects economists investigate than by the way
in which economists investigate them. Economists have a way of looking at the
world that differs from the way scholars in other disciplines look at the world. It is
the economic way of thinking; this unit introduces that way of thinking.
Economics is a social science that examines how
people choose among the alternatives available
to them. Economics can be described as social
because it involves people and their behavior.
Economics is also a science because it uses, as
much as possible, a scientific approach in its
investigation of choices.