Microeconomics Learning Material

Module 1: Economic Thinking

Why economic thinking matters?
PRE-ASSESSMENT (Self-check and will not be recorded)

I. Multiple Choice: Write only the letter of the best answer.

1. Basic consuming unit

a. firms c. household
b. resource d. mixed system
2. Desires and needs of consumers that have to be satisfied
a. Basic needs c. Luxury Goods
b. Wants d. All of the Above
3. It includes water, forest, minerals, and animals.
a. Land c. labor
b. Resource owners d. none of the above
4. Man’s mental and physical efforts exerted in production
a. Land c. labor
b. Entrepreneur d. capital
5. Machines, tools, equipment used in production
a. Land c. labor
b. Entrepreneur d. capital
6. Brains behind the business
a. Land c. Labor
b. Entrepreneur d. Capital
7. Inputs used in production
a. Land c. Labor
b. Capital d. All of the Above
8. Price of capital
a. Rent c. Wages
b. Profits d. Interest
9. Payment made to labor
a. Wage c. Rent
b. Profits d. Interest
10. Payment for the use of land
a. Rent c. Wages
b. Profits d. Interest
Why explain the basic premises and tools of economic thinking?

Many students are apprehensive about taking an economic course. Perhaps the source of
this concern is a misunderstanding of what economics is all about. It's not rocket science, it's not
a list of dull facts, and it's not about money or the stock market. Economics is basically just a
collection of fascinating questions centered around one simple fact: there aren't enough resources
(money, land, time, etc.) to meet all of our needs and desires. This is referred to as scarcity by
economists. Individuals, nations, and the entire human race are affected because no one ever has
enough of the things they desire. Everyone needs to deal with scarcity on some level, and
economists are interested in how individuals deal with it.

Economics can be an incredibly powerful tool if you understand how people behave in
the face of scarcity and learn to think like an economist. Individual economic agents, such as
customers or enterprises, can be predicted at the micro level, as economists call it. The behavior
of an economy (or economies) as a whole—what economists refer to as the macro level—can be
predicted. You can gain a deeper knowledge of your own choices—and their implications.

Consider the following example:

Imagine that you’re about to catch a flight to Cebu. You've been saving for this trip for a
long time and are overjoyed to finally be going. You think you're on top of the world until…
When you get at the airport, you must go through security.

The line is terrible. But what other options do you have? You won’t be able to board the
plane unless you pass through security. As you wait, you observe a different aisle for ―special‖
passengers who fly more often. They aren’t waiting at all. In fact, if there are more than three of
them in line and they have to wait more than a minute, they become irritated, shifting their
weight, rolling their eyes, checking their phones, and so on. Haynako! Yanong tagal! This is so
unfair.

Finally, you pass through security and arrive at your destination. Unfortunately, you are
at Zone 7, which boards last. To get to a center seat, you'll have to fight your way down the aisle,
through rows of seats with extra leg room.

And worse, people who boarded before you have already used up all of the overhead
bins. The fact that you have a huge carry-on luggage that won't fit under your seat irritates a
flight attendant. He takes your suitcase off the plane and instructs you to pick it up after the flight
at baggage claim.

You stare distantly from the cabin window and ask, ―Bakit ako’y minamalas ngayon?‖

You're probably wondering what all of this has to do with scarcity. Now, you should
study economics!
Learning Outcomes

At the end of this lesson, you are expected to:

 Explain what economics is and why is it important;

 Explain the usage of economic models;
 Use mathematics in everyday economic situations; and
 Use graphs in a variety of economic applications.

In order to understand economics it’s important to master a set of key definitions and
understand how they interconnect. These concepts will be used many times throughout the
course. At the most basic level:

 Scarcity means that there are never enough resources to satisfy all human wants;
 Economics is the study of the trade-offs and choices that we make, given the fact of
scarcity; and
 Opportunity cost is what we give up when we choose one thing over another.

We will spend more time with these definitions, and understand how they’re used in the
context of this discipline.

The specific things you’ll learn in this section include the following:

 Define scarcity and explain its economic impact;

 Define opportunity cost;
 Define productive resources;
 Explain why trade and markets exist; and
 Distinguish between macroeconomics and microeconomics.

Learning Activities

The following are some of the learning exercises for this section:

 Video: Scarcity and Choice;

 Reading: Understanding Economics and Scarcity;
 Video: Resources;
 Reading: The Concept of Opportunity Cost;
 Video: Opportunity Cost;
 Reading: Labor, Markets, and Trade; and
 Reading: Microeconomics and Macroeconomics.
Video: Scarcity and Choice

You will be watching a series of short lectures that explain difficult economic ideas in
layman’s terms, throughout this course. Take your time to look at them! They will assist you in
mastering the fundamentals before moving on to the readings (which tend to cover the same
information in more depth).

This video is available to view online: https://youtu.be/yoVc_S_gd_0

Consider the following crucial points as you watch the video:

1. Economics is the study of how humans make choices under conditions of scarcity.
2. Scarcity exists when human wants for goods and services exceed the available
supply.
3. People make decisions in their own self-interest, weighing benefits and costs.

Episode 2: Scarcity and Choice. Authored by: Mary J. McGlasson. Located at: https://youtu.be/yoVc_S_gd_0?t. License: CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives

Reading: Understanding Economics and Scarcity

Scarcity

We have a finite supply of the resources

we value: time, money, labor, tools, land, and raw
materials. There will never be enough resources to
meet all of our wants and demands. Scarcity is the
term for this situation.

There is a finite number of resources

available at any given time. Even though there are
a lot of resources, they are restricted. For example,
according the Philippine Statistics Authority, in
January 2021, some 4 million Filipinos were
unemployed. This is higher than the 3.8 million
unemployed in October 2020 and the 2.4 million in January 2020. Greatly affected due to the coronavirus
pandemic. Which means, there are only limited number of employment opportunities.

Another example is the total area of the Philippine archipelago, 300,000 square kilometers (30
million hectares), which includes land and water --- a good amount of acreage, but not endless. Because
these resources are limited, so are the numbers of goods and services we can produce with them. When
you consider that human desires appear to be essentially limitless, it's easy to see why scarcity is an issue.
Economics

We must make decisions when dealing with limited resources. Again, economics is the study of
how people make decisions in the face of scarcity. Individuals, families, corporations, and societies can
all make these judgments.

Let’s consider a few decisions that we make based on limited resources. Take the following:

1. What course subjects are you taking this semester?

Are you one of the fortunate students who gets to take any class you desire with the ideal
professor at the ideal time? Due to shortage, there's a good chance you have to make trade-offs.
There are a limited number of time slots available for classes each day, as well as a restricted
number of professors available to teach them. It is impossible to assign every faculty member to
every time slot. At any given time, each classroom can only have one class assigned to it. As a
result, each student must make trade-offs between the time slot and the instructor.

2. Where do you live?

Think for a second where you would live if you had all the money in the world. It's most
likely not where you're currently residing. You most likely chose your housing choice based on
scarcity. Which location did you decide on? Given your limited schedule, you may have opted to
live near your place of employment or school. Given the high demand for housing, certain areas
are more expensive than others, and you may have opted to spend more money for a handy
location or less money for a location that requires more travel time.

Because there is a finite supply of housing in any place, you must choose from what is
available at any given time. Housing decisions must always take into account a person's financial
situation. Individuals making housing decisions must deal with financial constraints, available
housing options, time constraints, and a variety of additional constraints imposed by builders,
landlords, city planners, and government rules.

The Problem of Scarcity

Every society, at every level, must decide about how to allocate its limited resources. Families
must choose between buying a new automobile and taking a luxurious trip. Local governments must
decide whether to spend more money on police and fire protection or on education. Nations must choose
whether to spend more money on national defense or environmental protection. Most of the time, the
budget just does not allow for everything.

Given that there are never enough resources to meet all needs and desires, economics helps us
understand the decisions that individuals, families, businesses, and society make.
Video: Resources

Here is the link to a short lecture on resources: https://youtu.be/0PgP0dXAGAE

Take note on the following key points from the video:

There are four productive resources (resources have to be able to produce something),
also called factors of production:
 Land: any natural resource, including actual land, but also trees, plants, livestock, wind,
sun, water, etc.
 Economic capital: anything that’s manufactured in order to be used in the production of
goods and services. Note the distinction between financial capital (which is not
productive) and economic capital (which is). While money isn’t directly productive, the
tools and machinery that it buys can be.
 Labor: any human service—physical or intellectual. Also referred to as human capital.
 Entrepreneurship: the ability of someone (an entrepreneur) to recognize a profit
opportunity, organize the other factors of production, and accept risk.

Read Appendix I: A Detailed Discussion on the Factors of Production.

Reading: The Concept of Opportunity Cost

Because resources are limited, every

decision you make about how to use them implies
a decision to reject possible options. Economists
use the term opportunity cost to indicate what
must be given up to obtain something that’s
desired.

A fundamental principle of economics is

that every choice has an opportunity cost. If you
sleep through your economics class (not recommended, by the way), the opportunity cost is the
learning you miss. If you spend your income on video games, you cannot spend it on movies. If
you choose to marry one person, you give up the opportunity to marry anyone else. In short,
opportunity cost is all around us.

The idea behind opportunity cost is that the cost of one item is the lost opportunity to do
or consume something else; in short, opportunity cost is the value of the next best alternative.
 Since people must choose, they inevitably face trade-offs in which they have to give up
things they desire to get other things they desire more.

Opportunity Cost and Individual Decisions

In some cases, recognizing the opportunity cost can alter personal behavior. Imagine, for
example, that you spend Php 80.00 on lunch every day at school. You may know perfectly well
that bringing lunch from home would cost only Php 20.00 a day, so the opportunity cost of
buying lunch at the canteen is Php 60.00 each day (that is, the Php 80.00 that buying lunch costs
minus the Php 20.00 your lunch from home would cost). Sixty pesos each day does not seem to
be that much. However, if you project what that adds up to in a year --- 200 schooldays a year ×
Php 60.00 per day equals Php 12,000.00 – it’s the cost, perhaps, of a decent vacation. If the
opportunity cost were described as ―a nice vacation‖ instead of ―Php 60.00 a day,‖ you might
make different choices.

Opportunity Cost and Societal Decisions

Opportunity cost also comes into play with societal decisions. Universal health care
would be nice, but the opportunity cost of such a decision would be less housing, environmental
protection, or national defense. These trade-offs also arise with government policies. For
example, after the terrorist plane hijackings on September 11, 2001, many proposals, such as the
following, were made to improve air travel safety:

 The US federal government could provide armed ―sky marshals‖ who would travel
inconspicuously with the rest of the passengers. The cost of having a sky marshal on
every flight would be roughly $3 billion per year.
 Retrofitting all U.S. planes with reinforced cockpit doors to make it harder for terrorists
to take over the plane would have a price tag of $450 million.
 Buying more sophisticated security equipment for airports, like three-dimensional
baggage scanners and cameras linked to face-recognition software, would cost another $2
billion

However, the single biggest cost of greater airline security doesn’t involve money. It’s the
opportunity cost of additional waiting time at the airport. According to the United States
Department of Transportation, more than 800 million passengers took plane trips in the United
States in 2012. Since the 9/11 hijackings, security screening has become more intensive, and
consequently, the procedure takes longer than in the past. Say that, on average, each air
passenger spends an extra 30 minutes in the airport per trip. Economists commonly place a value
on time to convert an opportunity cost in time into a monetary figure. Because many air travelers
are relatively highly paid businesspeople, conservative estimates set the average ―price of time‖
for air travelers at $20 per hour. Accordingly, the opportunity cost of delays in airports could be
as much as 800 million (passengers) × 0.5 hours × $20/hour—or, $8 billion per year. Clearly, the
opportunity costs of waiting time can be just as substantial as costs involving direct spending.

Opportunity Cost Video

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ASSESSMENT No. 1

When making decisions, we weigh the pros and cons, especially when it comes to money
matters. Often, we disregard the things we gave up once the choice has been made.

Most of the time, our day-to-day choices were not made with a full understanding of the
potential opportunity costs. The problem is we never look at what else can we do to the money
that we bought without considering the lost opportunities.

Now, let us determine the potential opportunity cost given the listed decisions made.

Answer the assessment from this link:

https://docs.google.com/forms/d/e/1FAIpQLSfYevfYbp5ErOyRJGBaICHxBxForZWhOxPnBoJ
eEoDFkmscHA/viewform?usp=sf_link

If you cannot access the link from this module, a link will be sent through your Google
Classroom.
Reading: Labor, Markets, and Trade

The Division and Specialization of Labor

We have learned that there aren’t enough resources to fulfill all of our wants and this
reality forces us to make choices that have opportunity costs. How do we get the most we can
from the resources we have? Over time, markets and trade have come into existence and have
become highly efficient mechanisms for optimizing our use of resources and bringing us the
most and best combination of goods and services.

Think back to pioneer days, when the average person knew how to do so much more on
his or her own than someone today—everything from shoeing a horse to growing, hunting, and
preserving food to building a house and repairing equipment. Most of us don’t know how to do
all—or any—of those things. It’s not because we’re not capable of learning them. It’s because
we don’t have to. The reason for this is something called the ―division and specialization of
labor,‖ a production innovation first put forth by Adam Smith.

The formal study of economics began when Adam Smith (1723–1790) published his
famous book, The Wealth of Nations, in 1776. Many authors had written about economics in the
centuries before Smith, but he was the first to address the subject in a comprehensive way.

In the first chapter of the book, Smith introduces the idea of the division of labor, which
means that the way a good or service is produced is divided into a number of tasks that are
performed by different workers, instead of all the tasks being performed by the same person. To
illustrate the division of labor, Smith counted how many tasks were involved in making a pin:
drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one
end and a point on the other, packaging pins for sale, and so on. Smith counted eighteen distinct
tasks that were typically performed by different people—all for a pin!

Modern companies divide tasks, too. Even a relatively simple business like a restaurant
divides up the task of serving meals into a range of jobs: top chef, sous chefs, less-skilled kitchen
help, host/hostess, waiters/waitresses, janitors, a business manager to handle accounts and
paychecks, etc. A complex business like a large manufacturing factory or a hospital can have
hundreds of job classifications.

Why the Division of Labor Increases Production

When the tasks involved with producing a good or service are divided and subdivided,
workers and businesses can produce a greater quantity of those goods or services. In his study of
pin factories, Smith observed that one worker alone might make twenty pins in a day, but that a
small business of ten workers (some of whom would need to do two or three of the eighteen
tasks involved in pin making), could make forty-eight thousand pins in a day. How can a group
of workers, each specializing in certain tasks, produce so much more than the same number of
workers who try to produce the entire good or service by themselves? Smith offered three
reasons.

First, specialization in a particular small job allows workers to focus on the parts of the
production process in which they have an advantage. People have different skills, talents, and
interests, so they will be better at some jobs than at others. The particular advantages may be
based on educational choices, which are shaped, in turn, by interests and talents. Only those with
medical training qualify to become doctors, for instance. For some goods, specialization will be
affected by geography—it’s easier to be a wheat farmer in North Dakota than in Florida, but
easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it’s
easier to attract enough customers to operate a successful dry-cleaning business or movie theater
than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in
the production of what they do best, they will be more productive than if they produce a
combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and
with higher quality. This pattern holds true for many workers, including assembly-line laborers
who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized
workers often know their jobs well enough to suggest innovative ways to do their work faster
and better. A similar pattern often operates within businesses. In many cases, a business that
focuses on one or a few products is more successful than firms that try to make a wide range of
products.

Third, specialization allows businesses to take advantage of economies of scale, which

means that, for many goods, as the level of production increases, the average cost of producing
each individual unit declines. For example, if a factory produces only one hundred cars per year,
each car will be quite expensive to make on average. However, if a factory produces fifty
thousand cars each year, then it can set up an assembly line with huge machines and workers
performing specialized tasks, and the average cost of production per car will drop. Economies of
scale implies that production is becoming more efficient as the scale of production rises.

The ultimate result of workers who can focus on their preferences and talents, learn to do
their specialized jobs better, and work in larger organizations is that society as a whole can
produce and consume far more than if each person tried to produce all of their own goods and
services. The division and specialization of labor has been a force against the problem of
scarcity.
Trade and Markets

Specialization only makes sense, though, if workers (and other economic agents such as
businesses and nations) can use their income to purchase the other goods and services they need.

In short, specialization requires trade. You do not have to know anything about
electronics or sound systems to play music—you just buy an iPod or MP3 player, download the
music, and listen. You don’t have to know anything about textiles or the construction of sewing
machines if you need a jacket—you just buy the jacket and wear it. Instead of trying to acquire
all the knowledge and skills involved in producing all of the goods and services that you wish to
consume, the market allows you to learn a specialized set of skills and then use the pay you
receive to buy the goods and services you need or want. This is how our modern society has
evolved into a strong economy.

Reading: Microeconomics and Macroeconomics

Micro vs. Macro

It should be clear by now that economics covers a lot of ground. That ground can be
divided into two parts: Microeconomics focuses on the actions of individual agents within the
economy, like households, workers, and businesses; macroeconomics looks at the economy as a
whole. It focuses on broad issues such as growth, unemployment, inflation, and trade balance.
Microeconomics and macroeconomics are not separate subjects but are, rather, complementary
perspectives on the overall subject of the economy.

To understand why both microeconomic and macroeconomic perspectives are useful,

consider the problem of studying a biological ecosystem like a lake. One person who sets out to
study the lake might focus on specific topics: certain kinds of algae or plant life; the
characteristics of particular fish or snails; or the trees surrounding the lake. Another person might
take an overall view and instead consider the entire ecosystem of the lake from top to bottom:
what eats what, how the system remains in balance, and what environmental stresses affect this
balance. Both approaches are useful, and both researchers study the same lake, but the
viewpoints are different.

In a similar way, both microeconomics and macroeconomics study the same economy,
but each has a different starting point, perspective, and focus. Whether you are looking at lakes
or economics, the micro and the macro insights should illuminate each other. In studying a lake,
the ―micro‖ insights about particular plants and animals help us to understand the overall food
chain, while the ―macro‖ insights about the overall food chain help to explain the environment in
which individual plants and animals live.

In economics, the micro decisions of individual businesses are influenced by the health of
the macroeconomy—for example, firms will be more likely to hire workers if the overall
economy is growing. In turn, the performance of the macroeconomy ultimately depends on the
microeconomic decisions made by individual households and businesses.

Microeconomics

What determines how households and individuals spend their budgets? What
combination of goods and services will best fit their needs and wants, given the budget they have
to spend? How do people decide whether to work, and if so, whether to work full time or part
time? How do people decide how much to save for the future, or whether they should borrow to
spend beyond their current means?

What determines the products, and how many of each, a firm will produce and sell? What
determines what prices a firm will charge? What determines how a firm will produce its
products? What determines how many workers it will hire? How will a firm finance its business?
When will a firm decide to expand, downsize, or even close? In the microeconomic part of this
text, we will learn about the theory of consumer behavior and the theory of the firm.

Macroeconomics
What determines the level of economic activity in a society or nation?—that is, how
many goods and services does it actually produce? What determines how many jobs are available
in an economy? What determines a nation’s standard of living? What causes the economy to
speed up or slow down? What causes firms to hire more workers or lay them off? Finally, what
causes the economy to grow over the long term?

An economy’s macroeconomic health can be assessed by a number of standards or goals.

The most important macroeconomic goals are the following:
- Growth in the standard of living
- Low unemployment
- Low inflation

Macroeconomic policy pursues these goals through monetary policy and fiscal policy:
- Monetary policy, which involves policies that affect bank lending, interest rates, and
financial capital markets, is conducted by a nation’s central bank. For the Philippines, it
is the Bangko Sentral ng Pilipinas.
 - Fiscal policy, which involves government spending and taxes, is determined by a
nation’s legislative body. For the Philippines, this is the Congress which establishes the
national budget.

To keep the differences between these policies straight, remember that the term monetary
relates to money, and the term fiscal relates to government revenue or taxes.

These are the main tools the government has to work with. Filipinos tend to expect that
government can fix whatever economic problems we encounter, but to what extent is that
expectation realistic? These are just some of the issues that will be explored later in this course.

Macro vs. Micro Video

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ASSESSENT No. 2

Here is an assessment to distinguish Microeconomics to Macroeconomics:

https://docs.google.com/forms/d/e/1FAIpQLSedLtxDl_HG5vzjmOU7LOruJiMRj7-
EfBeJC1HnIZFRTsP4RA/viewform?usp=sf_link

You may answer the quiz more than once. Your highest score will be recorded.
Appendix I: A Detailed Discussion on the Factors of Production

Factor of Production 1

Factors of production are the inputs needed for the creation of a good or service. The
factors of production include land, labor, entrepreneurship, and capital.

How Factors of Production Works?

The modern definition of factors of production is mostly based on a neoclassical

economics perspective. It combines previous economic theories, such as socialism's concept of
labor as a factor of production, into a single term.

Early political economists such as Adam Smith, David Ricardo, and Karl Marx classified
land, labor, and capital as components of production. Capital and labor are still the two most
important inputs for processes and earnings today. Certain indexes, such as the ISM
manufacturing index, can be used to track production, such as in manufacturing.

Four Factors of Production

2
Land as a factor
Land, as a factor of production, has a broad
definition and can take many forms, ranging from
agricultural land to commercial real estate to the
resources available from a specific piece of land. Oil
and gold, for example, can be taken and purified for
human consumption from the land.

Farmers boost the value and utility of land by

cultivating crops on it. Land was responsible for
providing economic value for a group of early
French economists known as "the physiocrats," who
predates the classical political economists.

While land is an important component of most businesses, its value can fluctuate
depending on the industry. A technological company, for example, can readily start operations

1
Jason Fernando (2021); “Factors of Production”; Investopedia; Retrieved from:
https://www.investopedia.com/terms/f/factors-production.asp
2
Image by Sabrina Jiang (2020) from Investopedia; Retrieved https://www.investopedia.com/terms/f/factors-
production.asp
with no initial land investment. Land, on the other hand, is the most important component of any
real estate venture.

Labor as a factor

The work put in by an individual to bring a product or service to market is referred to as

labor. It can take various forms. A construction worker on a hotel site, for example, is part of
labor, as is a waiter who serves visitors or a receptionist who registers them.

Labor is a term used in the software industry to describe the effort done by project
managers and developers to create the final product. Even an artist engaged in the creation of art,
whether a painting or a symphony, is regarded to be labor.

For the early political economists, labor was the primary driver of economic value.
Workers in the production line are compensated for their time and effort with pay that are
determined by their skill and training. Labor performed by an unskilled and untrained individual
is usually compensated at a low rate.

Skilled and trained workers are referred to as ―human capital‖ and are paid higher wages
because they bring more than their physical capacity to the task.

For example, an accountant’s job requires the analysis of financial data for a company.
Countries that are rich in human capital experience increase productivity and efficiency.

The difference in skill levels and terminology also helps companies and entrepreneurs
create corresponding disparities in pay scales. This can result in a transformation of factors of
production for entire industries. An example of this is the change in production processes in the
information technology (IT) industry after jobs were outsourced to countries with lower salaries.

Capital as a factor

In economics, capital typically refers to money. However, money is not a factor of

production because it is not directly involved in producing a good or service. Instead, it
facilitates the processes used in production by enabling entrepreneurs and company owners to
purchase capital goods or land or to pay wages. For modern mainstream (neoclassical)
economists, capital is the primary driver of value.

As a factor of production, capital refers to the purchase of goods made with money in
production. For example, a tractor purchased for farming is capital. Along the same lines, desks
and chairs used in an office are also capital.
 It is important to distinguish personal and private capital in factors of production. A
personal vehicle used to transport family is not considered a capital good, but a commercial
vehicle used expressly for official purposes is. During an economic contraction or when they
suffer losses, companies cut back on capital expenditure to ensure profits. During periods of
economic expansion, however, they invest in new machinery and equipment to bring new
products to market.

An illustration of the above is the difference in markets for robots in China compared to
the United States after the 2008 financial crisis. China experienced a multi-year growth cycle
after the crisis, and its manufacturers invested in robots to improve productivity at their facilities
and meet growing market demands.

As a result, the country became the biggest market for robots. Manufacturers within the
United States, which had been in the throes of an economic recession after the financial crisis,
cut back on their investments related to production due to tepid demand.

Entrepreneurship as a factor
Entrepreneurship is the secret sauce that combines all the other factors of production into
a product or service for the consumer market. An example of entrepreneurship is the evolution of
the social media behemoth Facebook Inc. (FB).

Mark Zuckerberg assumed the risk for the success or failure of his social media network
when he began allocating time from his daily schedule toward that activity. When he coded the
minimum viable product himself, Zuckerberg’s labor was the only factor of production.

After Facebook became popular and spread across campuses, it realized it needed to
recruit additional employees. He hired two people, an engineer (Dustin Moskovitz) and a
spokesperson (Chris Hughes), who both allocated hours to the project, meaning that their
invested time became a factor of production.

The continued popularity of the product meant that Zuckerberg also had to scale
technology and operations. He raised venture capital money to rent office space, hire more
employees, and purchase additional server space for development. At first, there was no need for
land. However, as business continued to grow, Facebook built its own office space and data
centers. Each of these requires significant real estate and capital investments.

Another example of entrepreneurship is Starbucks Corporation (SBUX). The retail coffee

chain needs land (prime real estate in big cities for its coffee chain), capital (large machinery to
produce and dispense coffee), and labor (employees at its retail outposts for service).
Entrepreneur Howard Schultz, the company’s founder, provided the fourth factor of production
by being the first person to realize that a market for such a chain existed and figuring out the
connections among the other three factors of production.

While large companies make for excellent examples, a majority of companies within the
United States are small businesses started by entrepreneurs. Because entrepreneurs are vital for
economic growth, countries are creating the necessary framework and policies to make it easier
for them to start companies.

Ownership of Factors of Production

In economic systems, the ownership of factors of production is assumed to be with

families, who lend or lease them to entrepreneurs and organizations. However, this is a
theoretical construct that is rarely observed in practice. The ownership of factors of production,
with the exception of labor, varies by industry and economic system.
For example, a firm operating in the real estate industry typically owns significant parcels
of land, while retail corporations and shops lease land for extended periods of time. Capital also
follows a similar model in that it can be owned or leased from another party. Under no
circumstances, however, is labor owned by firms. Labor’s transaction with firms is based on
wages.

Ownership of the factors of production also differs based on the economic system. For
example, private enterprises and individuals own most of the factors of production in capitalism.
However, collective good is the predominating principle in socialism. As such, factors of
production, such as land and capital, are owned and regulated by the community as a whole
under socialism.

Special Considerations

While not directly listed as a factor, technology plays an important role in influencing
production. In this context, technology has a fairly broad definition and can be used to refer to
software, hardware, or a combination of both used to streamline organizational or manufacturing
processes.

Increasingly, technology is responsible for the difference in efficiency among firms. To

that end, technology—like money—is a facilitator of the factors of production. The introduction
of technology into a labor or capital process makes it more efficient. For example, the use of
robots in manufacturing has the potential to improve productivity and output. Similarly, the use
of kiosks in self-serve restaurants can help firms cut back on their labor costs.
 Typically, the Solow residual, also known as ―total factor productivity (TFP),‖ which
measures the residual output that remains unaccounted for from the four factors of production,
increases when technological processes or equipment are applied to production. Economists
consider TFP to be the main factor driving economic growth for a country. The greater a firm’s
or country’s TFP, the greater its growth.

What are the factors of production?

The factors of production are an important economic concept outlining the elements
needed to produce a good or service for sale. They are commonly broken down into four
elements: land, labor, capital, and entrepreneurship. However, commentators sometimes refer to
labor and capital as the two primary factors of production. Depending on the specific
circumstances, one or more factors of production might be more important than the others.

What are examples of the factors of production?

Land refers to physical land, such as the acres used for a farm or the city block on which
a building is constructed. Labor refers to all wage-earning activities, such as the work of
professionals, retail workers, and so on. Entrepreneurship refers to the initiatives taken by
entrepreneurs, who typically begin as the first workers in their firms and then gradually employ
other factors of production to grow their businesses. Finally, capital refers to the cash,
equipment, and other assets needed to start or grow a business.

Are all factors of production equally important?

Depending on the context, some factors of production might be more important than
others. For example, a software company that relies primarily on the labor of skilled software
engineers might see labor as its most valuable factor of production. Meanwhile, a company that
makes its money from building and renting out office space might see land and capital as its
most valuable factors. As the demands of a business change over time, the relative importance of
the factors of production will also change accordingly.