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Factors of Production
HOW ARE GOODS PRODUCED? Factors of production The productive resources used to produce goods and services. Factors of production are grouped into four categories: • Land (Natural Resources) • Labor (Human Resources) • Capital • Entrepreneurship
HOW ARE GOODS PRODUCED? Land o. What Raw materials are needed to produce your product? o. The “gifts of nature” that we use to produce goods and services. All the things we call natural resources. o. Comes from the air, water, or the earth o. Land, minerals, water • Renewable SOURCES o. Water, air growing things • Non-Renewable SOURCES o. Coal, oil
Factor 1: Natural Resources • Nature supplies raw materials necessary to make things • These raw materials are called Natural Resources –Example: Chicken noodle soup contains chicken meat, spices, water, and vegetables, all of which came from the nature
HOW ARE GOODS PRODUCED? Labor • What will your employees have to do to create your product? • What work will need to be done to turn your raw material into your finished product o Work time and work effort that people devote to producing goods and services • People’s efforts, labor • Effort can be physical or mental
Factor 2: Human Labor • Human effort used to produce goods and services is called labor • Labor can be physical or mental • Example: to the soup, farmers raise the animals and crops, a truck driver drives them to a factory, and workers operate machinery to mix and can it (physical labor) • Someone has to design the machines, and think of a recipe for the soup (mental labor)
HOW ARE GOODS PRODUCED? o Capital o equipment and people will you need to create your product o Physical capital: What tools, machines and factories will you needed to create your product o Financial capital: funds the firm use to buy physical capital o Human capital: What knowledge, skills, education and experience will your employees need to have in order to produce your product (for example: a seamstress , a chemist, a computer technician ) • Goods made by people and used to produce other goods and services • Tools, instruments, machines, buildings, and other constructions that have been produced in the past and that businesses now use to produce goods and services.
Factor 3: Capital Resources • Producing goods and services requires tools and equipment • The buildings, machines, supplies, etc. used to produce are called capital resources, or capital goods • Examples: the truck used to drive to the factory, the machines used to can the soup, and the factory building itself
HOW ARE GOODS PRODUCED? o Entrepreneurship o The human resource (PEOPLE) that organized and combines labor, land, capital. • The quantity and quality of entrepreneurship is hard to describe and measure. • But we can easily recognize brilliant entrepreneurs by their enormous financial success. o Sam Walton (Wal-Mart), Bill Gates (Microsoft), and Michael Dell (Dell Computers) are examples of outstanding entrepreneur's.
Influences on Entrepreneurs Decision Making • To realize a profit, produce good/service at a cost lower than the market price for the good or service. • Profit is the money left over from selling a good or service after the cost of buying productive resources have been paid. o Minimize the use of scarce resource in production o Maximize the productivity of the factors used in production to keep cost as low as possible.
Entrepreneurship: The 4 th Factor • Making the other 3 factors of production into something useful often takes creativity and some risk • Entrepreneurship is the factor of production that ties the others together • Examples: Someone has to decide what to name the soup, where to sell it, and how much to charge
STOP AND THINK If you started your own business what would it be? What are some of the 4 Factors of production you would need. § 2 examples for each Land Labor Capit al Entrepreneur
CORPORATIONS- 20% OF BUSINESS 74%PROFITS
CORPORATION- SET UP Stock: shares of ownership in the corporation. § Literally sell you a piece of their company and use your money invested to further the company Stockholders (shareholders): owners of stock. Reasons to own stock: Dividends: share of corporate profits paid to stockholders Speculation: buy in hope that price of stock will increase.
Economic Systems How the Government influences how I make money.
Quick Review: • Take out a sheet of paper and answer the following questions: – What are Goods? – What are Services? – What are Resources? – What is Scarcity?
Economic Systems • Def. The method used by a society to produce and distribute goods and services. • Or, How the government tells us what we can get and how to get it!
All Economic Systems Must Consider the Following Questions: 1. 2. 3. 4. What goods and services to produce? How will they produce them? Who will get them? How much will they produce now, and how much later? • Each economic system answers these questions in a DIFFERENT WAY.
Types of Economic Systems There are 3 basic types of economic systems.
1. Traditional Economy • Economic questions are answered by habits and customs (the way it has always been done) • Children work the same jobs parents worked, often farming or hunter/gatherer • Fear Change! • Ex. Eskimos, the Amish, Pigmies, Bush People
2. Command Economy • The government answers the basic economic questions • Advantages: able to act quickly in emergencies, provide for all people equally • Disadvantages: Inefficient, no incentive to work hard or be creative • Ex. Communist Countries (China, Vietnam, North Korea, former Soviet Union, Cuba)
3. Free Market Economy • Economic questions are answered by individual buyers and sellers. • Supply and demand influence economy • People act out of self interest; motive for profit (money) drives the economy • Also known as FREE ENTERPRISE or CAPITALISM • BASED ON LAISSEZ-FAIRE • Ex. The United States, Western Europe, Japan
I lied! • I said there were 3 types of economic systems, but there is a 4 th! • Mixed Economy: No economy is pure market, pure command or pure traditional, elements of each appear in all economies, some have more elements of one economy than another. Market Mixed Command USA Great Britain China
American Mixed Economy • While the United States is mostly a free market economy, it does have elements of a command economy.
Features of American Free Market Economy 1. Economic Freedom: individuals have the right to choose 2. Competition: more than one producer of good/services insures choice 3. Private Property: individuals have the right to own their own property, including business
Features of American Free Market Economy (cont) 4. Self-Interest: individuals make decisions based on what is best for them 5. Voluntary Exchange: individuals may freely buy and sell goods 6. Profit Motive: individuals are driven by a desire to profit (make money)
Features of American Command Economy 1. Government regulation of some business practices • Ex. Wages, labor hours, safety practice. 2. Government limits certain choices • Ex. Cannot buy or produce certain goods/services 3. Government provides aid to the needy • Ex. Medicare, Medicaid, welfare
My Pizzeria • How would my pizzeria function under different economic systems?
My Pizzeria in a Free Market • I answer the basic economic questions! • I determine how much cheese and pepperoni goes on the pizza • I determine the quality of the cheese and pepperoni • I set my employees wages • I set my business hours
My Pizzeria in a Command Economy • The government answers the basic economic questions • The government sets the amount of cheese and pepperoni on each pizza • The government determines quality of cheese and pepperoni • The government sets employees wages • The government sets business hours Problem: What does the government know about pizza?
My Pizzeria in a Mixed Economy • The Government and I both answer the basic economic questions • I determine the amount of cheese and pepperoni on the pizzas; government determines the quality of cheese and pizza • I set employee wages; government sets minimum wage for employees • I determine business hours; government determines whether I am safe to be open or not