Scarcity and the Four Factors of Production by Omkar Abhyankar

 

Economics is the behavioral study of how individuals distribute scarce resources to fulfill their desires and necessities. Economics analyzes an individual’s actions and considers why they made those choices and how those choices affect others. Economics revolves around the concept of scarcity. Scarcity is defined as a limited or finite amount. In economics all resources are scarce, meaning they are limited. Scarcity is what drives individuals to make choices in the world. People’s desires are unlimited and cannot all be fulfilled due to the limited amount of resources and therefore are forced into decision making. Since resources are scarce, obtaining the proper amount and the correct resources is vital. The resources available in an economy are classified into four categories: Land, Labor, Capital and Entrepreneurship. All natural resources found in the place of production are classified as Land. For example, a farmer’s farming ground is a resource which is classified as land. Any type of worker or employee would be considered as a resource of labor. Capital is the goods and required knowledge needed to produce other goods. Capital is further categorized into three categories. Physical capital, human capital, and financial capital. Physical capital consists of physical goods used to produce other goods. Examples of physical capital include, machinery, or equipment. Human capital is the knowledge and the abilities which the workers have to produce a good. Human capital can sometimes be confused with labor. Labor is the workers themselves while human capital is the ability, skills and knowledge which the workers possess. Financial capital is the resource which is used to obtain the other necessary resources to produce a good. An example of financial capital is money since it is used to buy resources such as labor, land, machinery, etc. Entrepreneurship is the resource used to combine all the other resources properly to produce a good. Entrepreneurship is what binds all the other resources together to produce a good. An example of entrepreneurship is a designer or planner as they would combine land, labor and capital together by obtaining the appropriate amount to ultimately produce a good. These four resources are called the “four factors of production” and are all essential in the production of goods.

 

Information obtained from AP Economics Class attended by Omkar