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.
Economic resources definition
Economic resources are the inputs we use to produce goods and services. Economic resources can be divided into four categories: labour, land or natural resources, capital, and entrepreneurship (entrepreneurial ability). Labour refers to human effort and talent. Natural resources are resources, such as land, oil, and water. Capital refers to man-made equipment like machinery, buildings, or computers. Finally, entrepreneurship involves the effort and know-how to put all the other resources together.
Economic resources are also called factors of production.
Fig.1 - Factors of production
Economic resources or factors of production are the inputs into the production process, such as land, labour, capital, and entrepreneurship.
Imagine a pizza restaurant. The economic resources required to produce pizzas include land for the restaurant building and parking lot, labour to make and serve the pizzas, capital for the ovens, refrigerators, and other equipment, and entrepreneurship to manage the business and market the restaurant. Without these resources, the pizza restaurant couldn't exist as a business.
Types of economic resources
There are four types of economic resources: land, labour, capital, and entrepreneurship. We will analyse each of them below.
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 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, 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 businesses 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 working capital.
Entrepreneurship
Entrepreneurship is a special human resource that not only refers 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.
Economic resources examples
In the table below, you can find examples of economic resources. Keep in mind that these are just a few examples of each category of economic resources, and there are many other resources that could be included in each category. Nonetheless, this table should give you a good sense of the types of resources that are used to produce goods and services in the economy.
| Table 1. Examples of economic resources |
|---|
| Economic resource | Examples |
| Labour | The work of teachers, doctors, software engineers, chefs |
| Land | Crude oil, timber, freshwater, wind power, arable land |
| Capital | Manufacturing equipment, office buildings, delivery trucks, cash registers |
| Entrepreneurship | Business owners, inventors, startup founders, marketing consultants |
Characteristics of economic resources
There are several key characteristics of economic resources that are important to understand:
Limited supply: There are not enough resources to produce all the goods and services that people want. The fact that economic resources are limited in supply and have alternative uses gives rise to the concept of scarcity.
Alternative uses: Economic resources can be used in different ways, and the decision to use a resource for one purpose means that it cannot be used for another purpose.
Cost: Economic resources have a cost associated with them, either in terms of money or opportunity cost (the value of the next best alternative use of the resource).
Productivity: The amount of output that can be produced with a given input of resources varies depending on the quality and quantity of the resource.
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 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:
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:
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.
Importance of economic resources
Economic resources are essential for the functioning of any economy, as they are the inputs used to produce goods and services that satisfy people's wants and needs. The availability and efficient use of resources can have a significant impact on economic growth, employment, and living standards.
One of the main reasons why economic resources are important is that they are limited in supply, which gives rise to the concept of scarcity. Because there are not enough resources to produce all the goods and services that people want, societies must make choices about how to allocate their resources. These choices involve trade-offs, as using resources for one purpose means that they cannot be used for another purpose. The efficient use of economic resources is, therefore, essential for maximizing the output of goods and services and ensuring that they are distributed in a way that benefits society as a whole.
Economic Resources - Key takeaways
- Economic resources are the inputs used to produce goods and services.
- Economics resources are also known as factors of production
- There are four categories of economic resources: land, labour, capital, and entrepreneurship.
- There are four main characteristics of economic resources. Economic resources are scarce, they have a cost, they have alternative uses and different productivity.
- 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.
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