Introduction
-In economics, all of the worlds’ resources fall under four main categories. Resources, also known as factors of production or inputs, are things that are used in the production process of a good or service.
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Land
Land refers to the earth itself and all of the natural resources that we derive from it.
-The ground we stand on is considered land, but so is the air we breathe, the water that we drink, and the oil that we mine. To economists, all of that is lumped together under the category of land.
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Labor
Labor refers to the work that is done by people, whether it physical work (constructing a house) or mental work (accounting).
-As long as that work is used in the production of a good or service, it’s considered to be labor.
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Capital
Capital refers to anything that assists in the production of another good or service.
-A factory that manufactures cars is capital. The computer that I typed this post on is capital. The tables in restaurants are capital.
-There’s also another special type of capital called “human capital” which refers to your brain and your education. Your mind has the power to make things that no machine could ever replicate.
-The key defining difference between capital and consumer goods is the purpose that the good serves. If the product directly satisfies a want, then it is a consumer good. If it’s used in the production of something else that will satisfy a want, then it is a capital good. The same item (like a computer) could be classified as either a consumer good or a capital good, depending on who’s using it.
-In economics, the word capital does not refer to money as money itself can’t produce anything. We simply use money as a means of acquiring capital. To distinguish between the two, we often refer to money as financial capital.
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Entrepreneurial Ability
-The final resource is entrepreneurial ability. Entrepreneurial ability is different from labor in that an entrepreneur combines the three other resources (land, labor, and capital) to produce something new.
-An entrepreneur is also a risk bearer; he or she has no guarantee of making any money. In fact, all the time and effort spent trying to combine these resources in a meaningful way may even result in a loss. This is one of the key differences between an entrepreneur and a laborer.
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Next economics post: Understanding Opportunity Cost
Previous economics post: Ceteris Paribus (All Else Equal)

Disclaimer

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