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Economic Resouces

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Economics

Did you know that the work you put into your studies is an economic resource? The only difference between your studies and your future employment might be that you are not currently being paid to learn and acquire knowledge. In a way, you are investing your effort now for having a better job in the future. If only there were more than 24 hours in a day! Economists call this lack of a resource ‘resource scarcity’. Dive into this explanation to learn more about resources and their scarcity.

What are economic resources?

Economic resources are the resources used for carrying out economic activities. The main classes of economic resources are land, labour, capital, and entrepreneurship and the rest of the resources derive from these classes.

Figure 1 below depicts the main classes of economic resources, which are also known as the factors of production. These factors represent the scarce economic resources such as natural resources, human resources, and capital resources needed to produce economic output.

Economic Resources Factors of Production StudySmarterFigure 1. Factors of production - StudySmarter Originals.

Factors of production are the inputs into the production process, such as land, labour, capital, and entrepreneurship. This is another name for economic resources.

Types of economic resources or factors of production

As we mentioned above, the four factors of production are land, labour, capital, and entrepreneurship. Let’s explore them in further detail.

'Capital' can be categorised into fixed or physical capital, such as machinery, and working capital such as partly-produced products. 'Entrepreneurship' relates to combining the factors of production in order to take risk, make decisions and gain profit.

Land

Land constitutes natural resources such as water or metal. The natural environment as a whole is also classified under ‘land’.

Natural resources

Natural resources are sourced from nature and used for the production of goods and services. Natural resources are often limited in quantity due to the time it takes for them to form. Natural resources are classified further into non-renewable resources and renewable resources.

Oil and metal are examples of non-renewable resources.

Timber and solar power are examples of renewable resources.

Agricultural land

Depending on the industry, the importance of land as a natural resource may vary. Land is fundamental in the agricultural industry as it’s used to grow food.

The environment

The ‘environment’ is a somewhat abstract term that includes all the resources in the surrounding environment that we can use. They primarily consist of:

  • Abstract resources such as solar or wind energy.

  • Gases such as oxygen and nitrogen.

  • Physical resources such as coal, natural gas, and fresh water.

Labour

Under labour we classify human resources. Human resources do not only contribute to the production of goods but also play an essential role in offering services.

Human resources generally possess some form of education and skills. Businesses need to ensure their labour force is capable of conducting the production processes required by providing appropriate training and ensuring the safety of the work environment. However, the human resources are also capable of adjusting themselves, because they are a dynamic factor of production. They can increase their productivity to contribute more to the efficiency of production.

In terms of education or training, businesses can source labour from a specific educational background to reduce the training time.

When hiring for the department of network security, an IT company will look for candidates with an educational background in Computer Science or other similar subjects. Thereby, they do not need to spend extra time on training the labour.

Capital

Capital resources are resources that contribute to the production process of other goods. Hence, economic capital is different from financial capital.

Financial capital refers to money in a broad sense, which doesn’t contribute to the production process, though it is essential for the business and entrepreneurs to carry on their economic activities.

There are various types of economic capital.

Machinery and tools are classified as fixed capital. Partly-produced goods (work-in-progress) and inventory are considered as working capital.

Entrepreneurship

Entrepreneurship here doesn’t only refer to the entrepreneur who sets up a business. It also refers to the ability to come up with ideas that would be potentially turned into economic goods, risk-taking, decision-making, and running the business, which requires the incorporation of the other three factors of production.

An entrepreneur would need to take the risks of borrowing, renting land, and sourcing appropriate employees. The risk, in this case, involves the chances of not being able to pay the loan due to a failure in the production of goods or sourcing the factors of production.

Scarcity and opportunity cost

Scarcity is the basic economic problem. Because of scarcity, resources need to be allocated between competing ends. To respond to consumers’ wants, the distributions of resources need to be at the optimum level.

However, resource scarcity means that all the wants for different goods may not be satisfied, because the wants are infinite, whilst the resources are scarce. This gives a rise to the concept of an opportunity cost.

An opportunity cost is the next best alternative foregone when an economic decision is made.

Imagine that you want to buy a coat and a pair of trousers but you only have £50. The scarcity of resources (in this case money) implies that you have to make a choice between the coat and the trousers. If you choose the coat, the pair of trousers would then become your opportunity cost.

Markets and the allocation of scarce economic resources

The allocation of resources is regulated by the markets. A market is a place where producers and consumers meet, and where prices of goods and services are determined based on the forces of demand and supply. The market prices are an indicator and a reference for the producers’ resource allocation to different products. This way they try to gain the optimal rewards (for example, profits).

Free market economies

The prices of goods and services in a free market economy are determined by the forces of demand and supply without government intervention.

A free market is a market with little or no government intervention on either the demand or the supply sides.

There are several pros and cons of a free market economy.

Pros:

  • Consumers and competitors can drive product innovation.

  • There’s free movement of capital and labour.

  • Businesses have more choices in selecting a market (domestic only or international).

Cons:

  • Businesses can develop monopoly power more easily.

  • Issues relating to externalities aren’t addressed to meet the socially optimum demand.

  • Inequality may be worse.

Command economies

Command economies have a high level of government intervention. The government controls and determines the allocation of resources centrally. It also determines the prices of goods and services.

A command or planned economy is an economy in which the government has a high level of intervention in the demand and supply of goods and services, as well as the prices.

There are several pros and cons of a command economy.

Pros:

  • Inequality may be reduced.

  • Lower unemployment rate.

  • The government can ensure access to infrastructure and other necessities.

Cons:

  • A low level of competition can lead to a loss of interest in innovation and incentives to produce at a lower cost.

  • There might be inefficiency in the allocation of resources due to a lack of market information.

  • The market may not be able to respond to consumers’ needs and wants.

Mixed economies

A mixed economy is the most common economic system in the world.

A mixed economy is a combination of a free market and a planned economy.

In a mixed economy, some sectors or industries have free-market features, whilst others have features of a planned economy.

A classical example of a mixed economy is the UK economy. The clothing and entertainment industries have free-market features. Sectors such as education and public transport, on the other side, have a high level of government control. The level of intervention is influenced by the types of goods and services and the level of externalities resulting from production or consumption.

Market failure and government intervention

Market failure occurs when the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing an incorrect quantity. Market failure can often be caused by information failure due to information asymmetry.

When there is perfect information for both buyers and sellers in the market, scarce resources are allocated optimally. The demand for goods and services determines the prices well. However, the price mechanism may break down when there is imperfect information. This may result in market failure, for example, due to externalities.

Governments can intervene when there are externalities of consumption or production. For example, due to the positive externalities of education, governments tend to intervene by providing free public education and subsidising further education. Governments tend to raise the prices to restrict the demand level for consumption of goods that lead to negative externalities, such as cigarettes and alcohol.

Economic resources are thus the fundamental building blocks of economic activity.

Economic Resources - Key takeaways

  • Economic resources are the resources that are used for carrying out economic activities.
  • Factors of production are the inputs into the production process, such as land labour, capital, and entrepreneurship. This is another name for the economic resources.
  • Because of scarcity, resources need to be allocated between competing ends.
  • An opportunity cost is the next best alternative foregone when an economic decision is made.
  • There are three types of economies in terms of resource allocation: free-market economy, command economy and mixed economy.

Economic Resouces

Also known as the factors of production, economic resources are the resources used for carrying out economic activities. They include natural resources, human resources, and capital resources.

The allocation of resources is centrally controlled and determined by the government.

No. Money doesn’t contribute to the production process though it is essential for the businesses and entrepreneurs to carry on their economic activities. Money is a financial capital.

Factors of production.

Land, labour, entrepreneurship, and capital.

Final Economic Resouces Quiz

Question

What are three types of economic resources?

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Answer

Natural resources, human resources, capital resources.

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Question

What are economic resources otherwise known as?

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Answer

Factors of production.

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Question

What are the four factors of production?

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Answer

Land, labour, entrepreneurship, and capital.

Show question

Question

Money is an economic resource.

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Answer

False.

Show question

Question

What is a free market economy?

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Answer

An economy that has no or little government intervention.

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Question

What is a planned economy?

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Answer

An economy that is centrally controlled by the government.

Show question

Question

What is a mixed economy?

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Answer

An economy that has both features of a free market and a planned economy.

Show question

Question

What is the basic economic problem?

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Answer

Resource scarcity.

Show question

Question

What is an opportunity cost?

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Answer

The next best alternative foregone when an economic decision is made. 

Show question

Question

State one pro and one con of a free-market economy.

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Answer

Example answers could be:

Pros: 

  • Consumers and competitors can drive product innovations.
  • Free movement of capital and labour.
  • Businesses have more choices in selecting a market (e.g. domestic only or international).


Cons:

  • Businesses can develop monopoly power more easily.
  • Issues relating to externalities would not be addressed to meet the social demands. 
  • Therefore, inequalities may be increased. 


Show question

Question

State one pro and one con of a planned economy.

Show answer

Answer

Example answers could be:

Pros:

  • Inequality would be reduced.
  • Lower unemployment rate.
  • Infrastructure and the access to necessities can be ensured.

Cons:

  • Low level of competition can lead to a loss of interest in innovation and incentive to produce.
  • Inefficiency of the allocation of resources may occur due to a lack of market information.
  • The market may not be able to respond to consumers needs and wants.

Show question

Question

What are the two types of economic capital?

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Answer

Physical/Fixed capital and Working capital.


Show question

Question

Who or what determines the prices in a free market economy?

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Answer

Supply and demand.

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Question

Who or what determines the prices in a planned economy?

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Answer

The government.

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Question

What can cause market failure?

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Answer

A misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity. 

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Question

Define production possibility curves.

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Answer

Production Possibility Curves (PPC) depict the maximum output combinations of two goods that are produced in the economy when all resources are employed fully and efficiently.

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Question

What are the other names for production possibility curves?

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Answer

Production Possibility Frontier (PPF) or Transformation curve.

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Question

What are the assumptions made while plotting a PPF?

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Answer

It is assumed that the country has a fixed quantity of resources and a constant state of technology. 

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Question

What does a point under the production possibility curve mean?

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Answer

It means that the available resources in the economy are not fully employed.

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Question

What does an economy have to achieve to attain production possibilities above the production possibility curve?

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Answer

The country will have to increase their resources, improve their technology and productivity.

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Question

When does the PPC shift inward?

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Answer

When production factors such as raw materials or capital decrease, the PPC shifts inwards, indicating that the economy is producing fewer quantities.

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Question

What happens when an economy increases its available resources and/or improves technology?'

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Answer

The PPF will shift outwards indicating an increase in production.

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Question

How can short-run economic growth be brought about when all resources are not fully employed?

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Answer

A short-run economic growth can be brought about by using the rest of the resources and increasing aggregate demand.

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Question

How is resource allocation among goods decided?

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Answer

Allocating more resources for a product depends on choice and demand.


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Question

Define opportunity costs.

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Answer

 Opportunity cost is the benefit you sacrifice when choosing one option over another.

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Question

What is productive efficiency?

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Answer

Productive efficiency is the maximisation of output from available input. 

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Question

What is allocative efficiency?

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Answer

The best production combinations of goods and services result in allocative efficiency.

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Question

The LRAS curve of an economy represents a point on the country's PPC. 

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Answer

True

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Question

How does economic growth affect the LRAS curve and why?

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Answer

The LRAS curve shifts to the right. This is because, when there is economic growth, it signifies more supply resulting from an increase in demand.  

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Question

The only assumption that is made during the plotting of the PPC, is a fixed quantity of resources.

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Answer

False

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Question

The largest output a country can produce is called the _________.

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Answer

Maximum production capacity

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Question

An outward shift in PPC means economic downfall. 


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Answer

False

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Question

When capital increases, the PPC shifts ___________.

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Answer

outwards

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Question

When capital _________, the PPC shifts inwards, indicating that the economy is producing ______ quantities

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Answer

decreasing, fewer

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Question

Similar to the PPC, the LRAS curve also depends on the factors of production.  

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Answer

True

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Question

When there is negative economic growth, how are the PPC and LRAS curves affected?

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Answer

Both are affected negatively.

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Question

Allocative efficiency point relies on consumers’ tastes and preferences.  

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Answer

True

Show question

Question

Allocating more resources for a product depends on choice and ______.

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Answer

demand

Show question

Question

The negative economic growth could be due to a decrease in production factors, or a decrease in ______.

Show answer

Answer

demand.

Show question

Question

The main classes of economic resources are land, labour, ______ and _________.

Show answer

Answer

capital, and entrepreneurship  

Show question

Question

Define factors of production.

Show answer

Answer

Factors of production are the inputs into the production process, such as land, labour, capital, and entrepreneurship. 

Show question

Question

Machinery is considered capital.

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Answer

True

Show question

Question

What are the main components that constitute the production factor 'Land'?

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Answer

Natural resources, agricultural land, and the environment.

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Question

_______ is a production factor that can increase their productivity to contribute more to the efficiency of production. 

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Answer

Labour

Show question

Question

Economic capital is different from financial capital.  

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Answer

True

Show question

Question

What is an example of fixed capital?

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Answer

Machinery and tools are examples as fixed capital. 

Show question

Question

In economic resources, entrepreneurship only refer to the entrepreneur who sets up a business. 

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Answer

False

Show question

Question

The allocation of resources is regulated by the _______.

Show answer

Answer

markets 

Show question

Question

The pros of a free market economy include:

  • _____________________

  • _____________________

  • Businesses have more choices in selecting a market (domestic only or international).

 

Show answer

Answer

  • Consumers and competitors can drive product innovation.

  • There’s free movement of capital and labour.

Show question

Question

Worsening of inequality is a disadvantage of a free market economy.

Show answer

Answer

True

Show question

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