Satisfying People’s Wants
Economics is the study of how individuals and society choose to use limited resources in an effort to satisfy people’s unlimited wants. Satisfying such wants involves the production of economic goods and services. We will first define the terms “economic goods” and “economic services”, and then turn our attention to the factors of production needed to produce them.
Economic goods are things of value that you can see, and show to the others. They are things like bicycles, books, stereos, and clothing. Economic goods also include such things as factories, stores, machines, and tools.
Economic services are intangible things that have value but often cannot be seen, touched, or shown to others. The examples of economic services are medical care, legal advice, movies and national defence.
Factors of production are also called productive resources. These are the basic resources which are needed for the production of economic goods and services. Economists divide the factors of production into four basic categories: (1) natural resources, (2) capital goods, (3) labour and (4) entrepreneurship.
Natural resources are things provided by nature. Land, air, water, forests, coal, iron ore, oil, and other minerals are examples of natural resources. They are the starting points of all production, and they represent the most basic limitations of the productive capacity of an economy. In other words, no matter how much skilled labour and technological knowledge an economy has, it cannot create goods if it lacks natural resources.
Capital goods are human-made resources that are used for the production of other goods and services. Factories, machines, tools, railroads, trucks, and business buildings are all examples of capital goods.
It is important to distinguish between capital goods and consumer goods.
Consumer goods, which are not a factor of production, are finished products sold to consumers for their own personal use. They include such things as food, clothing, TV sets, and newspapers. In contrast capital goods are things that are used in the production of consumer goods and services. A factory that manufactures TV sets is a capital good. Some things can be either consumer goods or capital goods, depending on how they are used. For example, an automobile purchased for personal use is a consumer good. However, automobiles purchased for use as taxis or for other business purposes are capital goods.
Labour, sometimes called human resources, is any form of human effort exerted in production. It includes all kinds of work. The work of a janitor, teacher, lawyer, engineer, and the governor of your state are all examples of labour. Labour is essential to production, since natural resources and capital goods are of no value unless they can be put to use.
The three factors of production described above – natural resources, capital goods and labour must be combined and organized before production can take place. This is where entrepreneurship, the fourth factor of production, enters the picture. Entrepreneurship may be defined as the function of combining and organizing natural resources, capital goods, and labour, assuming the risks of business failure, and providing the creativity and managerial skills necessary for production to take place. An entrepreneur is a person who carries out these tasks in the hope of making financial gains from the endeavour.
The economy includes several sectors (also called industries), that evolve in successive phases. They are the following:
Primary sector. It involves the extraction and production of raw materials.
Secondary sector. It involves the transformation of raw or intermediate materials into goods.
Tertiary sector. It involves the provision of services to consumers and businesses.
Quaternary sector. It involves the research and development needed to produce products from natural resources.
Ex. 1. Find the information in the text to answer the questions:
What is the difference between economic goods and economic services? Give examples to illustrate them.
What are the basic categories of the factors of production?
Are consumer goods considered to be factors of production too? What is the difference between consumer and capital goods?
How can you prove that labour is an essential factor of production?
Are there any other factors that influence production in modern world?
What are the four main sectors of economic activity in modern economies?
Ex. 2. Put down words and word combinations from the text, use them to give its short summary.
Text 3
As you read the text, focus on the concept of “economic system” and its various types.