What’s it: Economic resources is another term for factors of production. They include human resources such as labor and entrepreneurship and non-human resources such as land and capital. Sometimes we refer to them briefly as inputs or resources.
Resources are essential for us. They are a prerequisite for starting and operating a business. And they are the factors used to produce goods and services. Then, we can fulfill our needs and wants from the goods and services produced by the business.
Types of economic resources
Economists divide economic resources into four types:
Land as economic resources
Although only abbreviated and called land, this term has a broader meaning. It doesn’t just refer to lands like areas for agriculture, shops, warehouses, factories, or offices. But, it includes all the natural resources available on planet earth. Therefore, some writers prefer the word “natural resources” as a substitute vocabulary.
And, in economics, rent is a reward for land.
Natural resources include what is available on the earth’s surface, rivers, forests, and lakes. They include the soil and the mineral resources contained therein. Examples of natural resources are:
In general, we group them into two categories: renewable and non-renewable resources.
- Non-renewable resources are scarce, limited in number, and cannot be replenished. They can be exhausted if we continue to exploit them. Metallic minerals oil, natural gas, and coal are examples.
- Renewable resources will not run out if we consume them, or we can increase their number. Examples are fish in the sea and wood in the forest. Another example is agricultural and plantation products, which, after we harvest, we can plant again.
Land resources are useful for various purposes in production. It is useful for agricultural land, factory locations, retail, and offices. Agricultural commodities, minerals, and petroleum are inputs for raw materials and energy. Furthermore, we can also use water and wind as energy sources to generate electricity.
Labor as economic resources
Labor represents human physical and mental effort used to produce goods and services. Individuals may work as white-collar workers or blue-collar workers. Some may operate machinery, do administrative activities in an office, maintain a retail store, or transport goods to a warehouse.
Then, the employer rewards the worker with a wage or salary as compensation for their labor. It also includes various benefits such as insurance and pensions.
Knowledge, skills, and experience are important factors to make workers productive. And, often, we refer to the labor factor as human capital. It refers to the skills, health, knowledge, and experience accumulated and attached to the individual. We get it through education, training, or learning by doing.
Investment in human capital is vital for increasing productivity. More productive workers enable businesses and the economy to produce more output. Furthermore, for businesses, it also allows them to make more profits because they bear fixed labor costs, and at the same time, can produce more output.
In a broad definition, human capital is not only attached to workers. However, it is also inherent in entrepreneurs who provide entrepreneurial input.
Thus, empowering human capital also produces other economic benefits. Human capital is critical for finding new solutions to problems, developing new ideas, and seeing business opportunities. And, in this case, it is attached to the entrepreneurial factor, not the labor factor.
In an economy, not all individuals are available to work. For example, some people may be outside the working-age (16-64 years), such as school children and the elderly.
Furthermore, among the working-age population, some individuals deliberately choose not to work. For example, they may be in college or caring for a family member. Or they give up hope and stop looking for work. Thus, they are not available for use in the production process.
Then, economists specifically refer to individuals who are ready to provide labor factors as a labor force. It consists of those who are currently working and unemployed but actively looking for work.
Labor quantity and quality
The production process depends not only on the quantity but also on the workers’ quality. Quality affects their productivity. And, productivity is the key to increasing production and spurring long-term economic growth.
An increase in productivity means workers can produce more output with the same input. In a production possibilities curve, it is indicated by a shift out of the curve.
Achieving higher productivity requires investments to improve the quality, for example, through education and training. In addition, technological factors also play an important role. Reliable technology enables workers to produce more output than using outdated technology. For example, workers in a factory can produce more output with an automatic machine than a manual machine. This is because they just control the machine with a computer.
Capital as economic resources
In the economic definition, capital refers to physical capital or capital goods, i.e., man-made tools to assist the production process. They range from simple tools like hoes to more complex ones like car assembly machines. Other examples are production equipment, logistics vehicles, and computers.
Economists say the reward for capital is interest.
Capital goods help businesses produce more output. However, unlike raw materials and components, they are not part of the output. Instead, businesses use them to assist in processing inputs such as raw materials into outputs.
What about financial capital?
Economists exclude financial capital such as money, bonds, or other financial assets because they do not contribute directly to production. We do not produce goods and services using money or debt securities.
- However, financial capital is just as important as capital goods. They contribute indirectly. Businesses use it to buy capital goods.
Then, like labor, it is not only quantity that affects production. The quality of capital goods also plays an important role, which is determined by technological progress. More sophisticated capital goods can produce a lot of output.
For example, manufacturers can use machine job computers to control and automate work in factories. It makes work faster and of higher quality compared to completely depending on workers to operate the machines.
Entrepreneurship as economic resources
Entrepreneurship refers to the effort or activity by individuals taking risks to set up a business. Those who do it we call entrepreneurs. They bring together the other three factors to produce a good or service. Then, as a reward, the entrepreneur hopes to make a profit.
Entrepreneurship has two main functions:
- Combines and organizes the other three factors. They combine natural resources, labor, and capital to be ready for use in the production process.
- Take risks and organize production activities. For example, they must divide operating activities into several business functions. They also have to take the risk if the business fails to survive.
In a small business, such as a home business, an individual performs both functions. But in large companies with more complex operations, the entrepreneurial function is shared between management and shareholders.
What to read next
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- Scarcity in Economics: Meaning and Explanation
- Economic Resources: Definition, Types
- Needs: Definition, Example, Type
- Wants: Definition and Examples
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- Opportunity Cost: Meaning, Importance, Examples
- Economic Efficiency: Meaning, Prerequisites, Why It Matters
- How are Economic Resources Allocated?
- Why Are Economic Resources Scarce?
- Why is Money Not an Economic Resource?
- Does Scarcity Only Work For The Poor? What Causes Scarcity?
- What Are the Consequences of Scarcity in Economics?
- Three Basic Economic Questions and Resource Allocation