What Are Resources?
In the context of economics, resources generally refer to anything used to produce or make goods and services. Resources are also commonly labeled as factors of production, of which can be sorted into four main categories:
Land: the productive factor of land refers to all natural, raw resources from the Earth that are exploited and used in production. This could include the parcel of land a business sits on, but also ranges from the gold mineral used in the production of jewelry to the oil used in the production of gasoline.
Labor: the productive factor of labor refers to all people responsible for creating and providing goods and services. You might have heard of the sum of labor be labeled as the “workforce”, “human resources”, or “human capital.” These are the chefs that bake your favorite cake, the factory workers assembling a new phone, or the teachers that help you learn economics. Labor often varies by the level of productivity, as more knowledgable and skilled laborers with greater access to useful tools will produce more than laborers who are lacking those qualities. For example, a farmer with a high-tech shovel will produce more crop than a farmer with a standard shovel—hence the discrepancy in labor productivity.
Capital: the productive factor of capital refers to all machinery, tools, buildings, and technology used to make and provide goods and services. Capital often does not end up in the final product, but instead helps facilitate its production. For example, a factory is referred to as a capital resource. Factories help produce your beloved toys and electronics, and schools help provide your education. These are examples of how capital is a factor of production.
Entrepreneurship: the productive factor of entrepreneurship refers to the people (entrepreneurs) who combine the other factors of production (land, labor, capital). Entrepreneurs are innovators, and they pioneer new ways to intertwine resources into creating new businesses, inventing new products, and providing new services. The founders of Apple, combined the productive factors of land (minerals used in the iPhone), labor (Wozniak’s development of the iPhone’s software), and capital (factories used to mass-produce and vans used to distribute the iPhone) in an entrepreneurial venture that created one of the most successful businesses that continues to create millions of products to this day.
How Are Resources Allocated?
How Are Resources Allocated?
There are three fundamental economic questions that, depending on how a society answers them, determine the economic system: What goods and services will be produced? How will goods and services be produced? And who gets the goods and services? The answers to these questions help understand how a society falls into one of the following economic systems:
Market Economy: In a market economy, resources are allocated through the forces of supply and demand. Businesses produce goods and services based on what consumers are willing to pay for, and prices are set through competition. People with more money can afford more goods and services, while businesses focus on efficiency to maximize profits. The government’s role is minimal, mainly ensuring a fair and competitive environment.
Command Economy: In a command economy, the government makes most of the decisions about production and distribution. It determines what goods will be made, how they’ll be produced, and who will receive them. The focus is often on fulfilling the needs of the population, but this can sometimes lead to inefficiencies or shortages if the government miscalculates demand.
Mixed Economy: Most countries have a mixed economy, where both market forces and government regulations play a role in resource allocation. While businesses operate independently, the government steps in to regulate or provide services in certain sectors, such as healthcare or education. This system tries to balance the efficiency of a market economy with the need for government intervention to address inequalities or protect public interests.
Traditional Economy: In a traditional economy, resources are allocated based on customs, traditions, and historical precedent. Goods and services are typically produced the same way they’ve been for generations, and wealth is distributed according to established social structures. This system is often found in rural or agricultural communities where family or community needs drive production rather than profit.
Each system has its strengths and weaknesses, and societies often choose or adapt a system based on their values, resources, and historical circumstances. Understanding how these systems allocate resources helps explain why different countries prioritize production, distribution, and consumption in different ways.