VI. Writing

Write an essay on one of the following topics. Use the ideas and vocabulary from the unit. Try to incorporate the following:

• an introductory paragraph that presents the topic;

• paragraphs (at least two) that develop your arguments with supporting evidence;

• a conclusion that reinforces the position you have taken.

  1. Economic analysis is applied throughout the society: in business, finance and government, in the family, health and education, in politics and science.

  2. Are you planning to specialize in national or international economics? Why?

Use the same tactics when writing essays on the topics of all the other units.

Unit 2 Microeconomics and Macroeconomics.

Factors of Production

I. Anticipating the Issue

Discuss your answers to the following questions.

1. What is economics / macroeconomics / microeconomics?

2. What are factors of production?

3. What are basic economic questions a country’s economy has to answer?

II. Background Reading

Read the following text. Focus on the meaning of the boldfaced words. Determine whether what you anticipated coincides with the information of the text.

Microeconomics and Macroeconomics.

Factors of Production.

1. For scientists, everything in the earth, air, and water – and beyond – is a source of data to be observed and studied. Yet the data often make little sense until they are seen through the lens of a microscope or telescope. Economic information, as with scientific data, takes on meaning when it is viewed through the most useful lens. Two of the lenses through which economists observe economic behaviour are microeconomics and macroeconomics.

2. Microeconomics is the study of the behaviour of individual players in an economy, such as individuals, families, and businesses. Macroeconomics is the study of the behaviour of the economy as a whole and involves topics such as inflation, unemployment, aggregate demand and aggregate supply. It is concerned with large-scale economic activity. While the limited spending power of an unemployed person would be in the realm of microeconomics, the effect of widespread unemployment on the whole nation would be a macroeconomic issue.

3. While microeconomics considers the individual consumer, macroeconomics studies the consumer sector. Macroeconomics also examines the business sector and the public, or government, sector.

4. Consumers have many economic wants. Wants are desires that can be satisfied by consuming goods or services. When making purchases, people often make a distinction between the things they need and the things they want. Needs are things, such as food, clothing and shelter that are necessary for survival.

5. People always want more, no matter how much they have already. In fact, wants are unlimited, but the resources available to satisfy them are limited. The result of this difference is scarcity, the situation that exists when there are not enough resources to meet human wants. Scarcity in the lives of individual consumers is the gap between their unlimited wants and limited resources. Scarcity is not a temporary shortage of some desired thing. It is a fundamental and ongoing tension that confronts individuals, businesses, producers, governments and whole societies. Shortages are often temporary. Scarcity, however, never ends because wants always exceed the resources available to satisfy them.

6. Indeed, scarcity requires every society to address three basic economic questions: What will be produced? How will it be produced? For whom will it be produced?

7. To understand how societies answer the first two basic questions – what to produce and how to produce – economists have identified the factors of production, or the economic (productive) resources needed to produce goods and services. They divide the factors of production into three basic categories: land, labour, and capital. In addition, many economists add a fourth factor of production, entrepreneurship, to the list. All of these factors have one thing in common – their supply is limited. Each factor plays a unique role in the production of goods, and each factor is clearly distinguishable from the others.

8. In economic terms, land includes all the natural resources found on or under the ground that are used to produce goods and services. Land can be defined as everything in the universe that is not created by human beings. Water, forests, and all kinds of wildlife belong in the category of land. So, too, do buried deposits of minerals, gas, and oil. Land is the passive factor in production. It is the starting point of all production, and it represents the most basic limitation on 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.

9. Labour, sometimes called human resources, is all the human time, effort and talent that go into the making of products. Labour is not only the work done by factory workers and construction workers. It also includes the work of architects, teachers, doctors, shop assistants and government officials. In economics, labour is a measure of the work done by human beings. Labour is essential to production, since natural resources and capital goods are of no value unless they can be put to use.

10. Capital is all the resources made and used by people to produce and distribute goods and services. Tools, machinery and factories are all forms of capital. So are offices, warehouses, stores, roads and airplanes. In other words, capital is all of a producer’s physical resources. For this reason, capital is sometimes called physical capital, or real capital.

11. It is important to distinguish between capital goods and consumer goods. Capital goods are human-made resources that are used for the production of other goods and services. Consumer goods are finished products sold to consumers for their own personal use. Some things can be either consumer goods or capital goods, depending on how they are used.

12. While businesses invest in real capital, workers invest in human capital – people’s innate abilities and talents plus the knowledge and skills gained through experience. Human capital can be increased by investing in health care, education, and job training. Human capital includes such things as a college degree or good job training. When workers possess more human capital, they are more productive.

13. The fourth factor of production, entrepreneurship, brings the other three factors together. Entrepreneurship is the combination of vision, skill, ingenuity and willingness to take risks that is needed to create and run new businesses. Most entrepreneurs are innovators. They try to anticipate the wants of consumers and then satisfy these wants in new ways. This may involve developing a new product, method of production, or way of marketing or distributing products. Entrepreneurs are also risk takers. They risk their time, energy, creativity and money in the hope of making a profit.

14. Fixed and Variable factors: In the act of production a firm uses a variety of goods and services called production resources (factors of production) or inputs. These factors and services include plant and machinery, factory premises, tools and equipment, land, raw materials, labour etc. Some of these factors are fixed in size. A machine or manager has to be employed in its full capacity, irrespective of the volume of the output. Other factors like labour and raw materials can be employed in small or large units according to the varying quantity of output. These are variable factors of production. Fixed factors are indivisible while variable factors are divisible into small units. Fixed factors are supplementary in nature. Machines make productive activity more convenient and efficient. However, even in their absence, output of some volume can be produced. Variable factors are called prime factors without which no output can be produced.

15. The distinction between the two types of factors is the basis of cost-benefit analysis and the law of returns. If all the factors of production were perfectly divisible and variable, the cost of production would have increased in the exact proportion of the output. As this is not the case, a special cost-benefit analysis becomes important.