1

Assignment # 3
PRODUCTIVE RESOURCES

Learning Objectives:

After reading and studying this chapter, you should be able to:
1. identify the factors of production.
2. determine the factors in manipulating the production possibilities frontier.
3. apply concepts to answer the following activities.

Productive Resources..........................................................................................

In order to create wealth, we have to produce something and sell it. An economics professor
produces an economics lecture, which is a service; the Backstreet Boys produce concerts, which
are also (except maybe to society) services. At WVSU, we produce goods, such as economics
workbooks. In either case, no one produces anything from nothing. Just as workbooks and
lectures are the output of the production process, there are inputs, too. For instance, to
produce this workbook, I’m writing on a notebook computer, and I’m using a few different
programs to create the text and the visual aids. Eventually, the finished product must be
published, which usually requires a printer, some toner, and some paper. The alternate process
of publishing the workbook on-line will require the time and knowledge of the person who
converts the file and makes it available for readers to download, as well as a computer server
somewhere and access to bandwidth. And of course, there’s my contribution—my knowledge,
experience, creativity, and ability (such as it is.) All those things—materials, software,
knowledge, and experience—are the productive resources we use to create an economics
workbook.

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 2

1.11 CATEGORIZATION

At least there’s a 50-50 chance. Decide whether each of the following products is a good or
a service. Then underline the appropriate choice. An example is provided.

Good Service Dolphin Costume

1. Good Service Economics Lecture

2. Good Service Backstreet Boys Concert

3. Good Service Tae-bo Video

4. Good Service Three-Hour Tour

5. Good Service Havaianas Slippers

The Factors of Production

In the language of economics, the inputs to the production process are called the “factors of
production.” There are four factors of production: land, labor, capital, and
entrepreneurship. By definition, the factors are the scarce resources we use to produce
goods and services. Ultimately, we use them to create wealth.

The factors of prodution are the inputs to the production process.

Natural resources include land and raw goods in their natural environment, like the coal in a
coal mine or the trees in a forest. If the coal has already been mined, we can’t call it a “natural
resource” anymore. If the trees have already been cut down and turned into lumber, they don’t

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 3

count either. Sometimes, natural resources are simply referred to as “land.” We pay rent for
the use of land.

Capital resources are what we produce to help us produce other things. They include
buildings, equipment, vehicles, machinery, and other physical assets. According to some
economists, they also include intermediate goods, like lumber. By that definition, after oil has
been extracted and refined, we should consider it a capital resource. In some texts, capital
resources are simply called “capital.” We pay interest for the use of capital.

We can divide capital into “physical capital” and “human capital,” where “physical capital”
includes the things I’ve just discussed, and “human capital” includes anything that improves the
quality of the workforce, such as education or training. More specifically, human capital consists
of the knowledge and skill people acquire to enhance their productivity, such as a political
operative’s grasp of Senate tactics, a cab driver’s knowledge of streets or your understanding of
economics.

In most texts, human resources are simply called “labor,” and I suspect you’ll prefer that
term, too. Labor is the human part of the production process. That is, it’s the physical and
mental efforts of humans in the production process. We pay wages in exchange for labor; put
another way, we pay wages to laborers for the use of their time.

Entrepreneurial resources are the resources we use to either improve the output of the
production process or to create new output. In some texts, entrepreneurial resources are simply
called “entrepreneurship,” and I suspect you’ll prefer to use that term. Entrepreneurship
consists of the ability to combine the other factors of production in a new way, or to achieve
new results. It also consists of a person’s willingness to take risks in order to earn a profit. Just
as laborers earn wages, entrepreneurs earn profits.

Keep in mind that human capital is not usually counted as part of capital in general, as it is not
paid interest. Instead, when actually used to produce a good or service, it is referred to as part
of labor and earns a wage; when it is employed entrepreneurially, it earns a profit.

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 4

Unfortunately, the inputs to the production process do not always fall easily into four, clear-cut
categories. For example, we “produce” farmland to grow crops; shouldn’t that make it a “capital
resource”? Or should it be a “natural resource”?

1.12 CATEGORIZATION

Be resourceful. Below is a list of inputs to the production process. For each input, indicate
which of the four factors of production is represented. The first one has been answered for you.
(Hint: for this exercise, “human capital” is counted as part of labor, or human resources.

1. natural resources______an oil reserve

2. ___________________ the initiative to combine water, lemons, and sugar to make
lemonade for sale
3. ___________________ a rain forest
4. ___________________ buildings
5. ___________________ the knowledge and training required to answer phones and
schedule appointments for a dentist’s office
6. ___________________ machinery
7. ___________________ a laborer’s training
8. ___________________ the knowledge needed to design advertising campaign
9. ___________________ lumber
10. ___________________ the land on which a factory is built
11. ___________________ the ability to create and operate a new summer camp
12. ___________________ the ability to organize and train writers to produce exams,

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 5

workbooks, flashcards, and other materials

13. ___________________ a printing press
14. ___________________ raw goods
15. ___________________ a mainframe computer

1.13 EXAM PRACTICE

On the test. The question below is similar to one you might see on exam day. First, cross out
the factors of production you have learned. Then, circle the letter of the correct answer choice.

Which of the following is NOT a factor of production?

a. land
b. capital
c. money
d. entrepreneurship
e. labor

Manipulating the Production Possibilities Frontier.....................................................

The factors of production determine the shape and position of the Production Possibilities
Frontier. If the factors of production increase or improve (often due to advances in technology),
the frontier shifts outward into a position that was previously unattainable. On the other hand,
if the factors of production decrease or suffer a loss of quality, the frontier shifts inward. If
there is a severe shortage of one factor, the shape of the frontier may change.

Let’s consider an example. Suppose a successful dairy farm buys some new cows. A factor of
the farm’s production increases and the farm is able to produce more milk. A Production
Possibilities Frontier would reflect the increase by expanding outward; it would move to show
the possibility of producing a higher quantity of milk.

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 6

Now suppose the cows become angry and decide to take action. They form a livestock union
and refuse to give milk until the quality of their feed improves. A factor of production decreases
dramatically. Only a few cows are left to produce non-union milk. A PPF would reflect this
change by shifting inward; it would move to show the lowered possibility of milk production.

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 7

1.14 TRUE OR FALSE

Truth hurts. Below is a list of statements about the topics we’ve covered. Determine whether
each statement is true or false. For true statements, circle “T.” For false statements, circle “F”
and then correct the statements to make them true.

1. T F As factors of production, education and training are considered physical

capital.

2. T F The basic problem of economics is neo-conservatism.

3. T F The study of economics assumes humans have unlimited wants and

limited resources with which to satisfy those wants.

4. T F The four factors of production are technology, strategy, savvy, and

sapience.

5. T F An increase in a factor of production will cause the PPF to expand

outward.

6. T F In the language of economics, “entrepreneurship” is something that

creates wealth.

7. T F TANSTAAFL stands for, “Economists have a poor sense of humor.”

8. T F Natural resources include fossil fuels, trees, and coal mines.

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 8

1.15 MATCHING

Match-ismo. Match the letter of each event, in the column on the left, to the BEST description
of how it would affect the PPF, in the column on the right. You may match more than one event
to each description.

a. A farmer acquires new land. 1. ___ the PPF shifts

outward

b. A change in technology allows a printer to increase 2. ___ the PPF shifts

his daily productivity by 20 percent. inward

c. An auto manufacturer decides to produce more trucks 3. ___ no change in the

at the expense of having to produce fewer cars. Some of PPF
the factory workers will have to be moved to new areas.
4. ___ the PPF is a
d. A shoemaker hires an assistant. Straight line

e. Dairy cows are upset when they realize they’ve been

working to produce nuclear missiles. They organize an
escape and run away to freedom.

f. Environmental activists set up camp in an old forest,

acting as human shields to protect trees from logging
companies.

g. A pizzeria begins accepting on-line orders for delivery.

h. A publisher determines that his printing cost for sappy

romance novels is exactly equal to his printing cost for
mystery novels, as long as both are printed as trade
paperbacks.

i. A workbook writer finally finished her B.S. in economics.

j. A chemical fire destroys a factory building and most of

the machinery inside.

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3

 9

1.16 SENTENCE COMPLETION

Picky, picky, picky. Circle the answer choice that BEST completes each statement below.

1. An increase in a factor of production, other factors held constant, will result in an

(OUTWARD, INWARD) shift of the Production Possibilities Frontier.

2. Movement along the PPF represents a(n) (EXPANSION, TRADE-OFF) in production

possibilities.

3. A decrease in a factor of production, other factors held constant, will result in an (OUTWARD,
INWARD) shift of the Production Possibilities Frontier.

1.17 MATCHING

Explain yourself. Match the letter of each drawing to the explanation it BEST represents.

1. __________ the result of an improvement in technology

2. __________ production possibilities for two goods that are very similar

3. __________ a trade-off

4. __________ the result of a loss of quality in one of the factors of production

Prepared by: MARY ANN M. DE LA VEGA, PhD. Basic Microconomics – Assignment #3