Understanding Economic Factors of Production

Economic Factors of Production and Income

Factors of Production Defined

• Land (including natural resources): All the "gifts of nature" that we use to produce goods and services.
• Labor: The work time and work effort that people devote to producing goods and services.
• Capital: Consists of tools, instruments, machines, buildings, and other items that have been produced in the past and that businesses now use to produce goods and services.
• Entrepreneurship: The human resource that organizes labor, land, and capital. This involves coming up with new ideas about what and how to produce, making business decisions, and bearing the risks that arise from these decisions.

Human Capital

Human Capital is the knowledge and skill that people obtain from education, on-the-job training, and work experience.

Incomes Paid to Factors of Production

Factors of Production are paid incomes in the form of:

• Rent
• Wages
• Interest
• Profit (or loss)

Profit Definition

Profit (or loss) is the income earned by an entrepreneur for running a business.

Income Distribution Concepts

Functional Distribution of Income

The distribution of income among the factors of production.

Personal Distribution of Income

The distribution of income among households.

Production Possibilities

Production Possibilities Defined

The combinations of goods and services that can be produced within a community for a given quantity and quality of economic resources.

Production Possibilities Frontier (PPF)

A graphic representation of an economy's trade-off at a given point in time.

Attainable and Unattainable Combinations

The PPF shows the limits to production, separating attainable combinations from unattainable ones.