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Scarcity – A situation where people have unlimited wants but there are limited resources available.

Scarce Resources (Factors of Production)

There are 3 scarce resources also known as factors of production; land, labour and capital. They are used to produce output such as goods and services which in turn increases the standard of living of the population. 

Capital is produces resources that can increase the production of another good; examples of this include factories, machines and tools. Remember that in economics when referring to capital, we are not talking about money capital, but about the goods that can be used to make other goods. To increase the capital stock (the amount of capital goods, i.e. factories and machines) investment needs to be undertaken. In economics investment is not referring to savings or the purchase of stocks and share or other assets but is the production or purchase of capital goods.

Land is all the minerals and resources, underground, on ground and above ground that can be used in production; for example, raw materials and the land occupied by a factory or where food may be grown.

Labour is all the people in an economy and available time that they are willing to work.

Opportunity Cost – is the value of the next best foregone alternative when making a choice.

The opportunity cost of producing consumer goods (goods that are sold to households like televisions and computers) is that of producing capital goods. If an economy is fully geared to producing consumer goods (that is all it produces) then it wont be able to produce capital goods. Obviously there is more balance in a real economy, however by producing a marginal unit of a consumer good means you may not be able to produce an extra capital good. Therefore in this example the opportunity cost is a unit of a capital good.

The balance between the production of goods (and services) is looked at in the next section; PPF.

Page last updated on 20/10/13