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Section 1 Scarcity and the Factors of Production

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Objectives

After studying this section you will be able to:

1. Explain why scarcity and choice are basic problems of economics.
2. Identify land, labor, and capital as the three factors of production, and identify the two types of capital.
3. Explain the role of entrepreneurs.
4. Explain why economists say all resources are scarce.

Section Focus

People, businesses, and governments must choose among limited or scarce resources. Economics describes how people seek to satisfy their needs and wants by choosing among many alternatives.

Key Terms

• need
• want
• economics
• goods
• services
• scarcity
• shortage
• factors of production
• land
• labor
• capital
• physical capital
• human capital
• entrepreneur

As you begin your study of economics, consider three scenes: In the first scene, members of a household work together to do the laundry, purchase groceries, make meals, earn money, decide how to spend their money, and decide who gets to hold the TV remote.

In the second scene, the leaders of a large corporation sit at a table for their monthly meeting. They discuss whether to add a new product to their product line and advertising options on television and the Internet.

In the third scene, senators in the United States Congress gather to debate the important issues of the day: How can we ensure that people are well fed and have access to health care? What limits should the government place on businesses and international trade? Who gets to control the Internet? Economists look at the decisions made in each of these scenes and study those decisions in greater detail.

Scarcity and Choice

The study of economics begins with the idea that people cannot have everything they need and want. A need is something like air, food, or shelter that is necessary for survival. A want is an item that we desire but that is not essential to survival. Because people cannot have everything they need or want, they must consider their options and decide which choice will fill their needs best.

To look at the world economically, we can focus on the decisions that people make. You, for example, have to decide what to do with your time—go to a movie or study for a test. Businesses have to decide how many people to employ and how much to produce. A city government may have to decide whether to spend its budget to build a school or a park.

Economics is the study of how people seek to satisfy their needs and wants by making choices. Because people act individually, in groups (such as businesses), and through governments, economists study each of these groups. But why must people make such choices? The reason is scarcity.

Scarcity

Living in a relatively wealthy country, many Americans may find it hard to understand the idea of scarcity. Store shelves brim with goods. Goods are physical objects such as shoes and shirts. We have access to countless services. Services are actions or activities that one person performs for another. Haircuts, dental checkups, and tutoring are all services.

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