Chapter 1

Chapter
Scarcity and the
Factors of Production
Preview
Objectives
Section Focus
Key Terms
After studying this section you will be able to:
People, businesses, and
governments must
choose among limited or
scarce resources.
Economics describes
how people seek to
satisfy their needs and
wants by choosing
among many alternatives.
need
want
economics
goods
services
scarcity
shortage
factors of
production
1. Explain why scarcity and choice are basic
problems of economics.
2. Identify land, labor, and capital as the three
factors of production, and identify the two
types of capital.
3. Explain the role of entrepreneurs.
4. Explain why economists say all resources
are scarce.
s you begin your study of economics,
consider three scenes: In the rst scene,
members of a household work together to
do the laundry, purchase groceries, make
meals, earn money, decide how to spend
their money, and decide who gets to hold
the TV remote.
In the second scene, the leaders of a large
corporation sit at a table for their monthly
meeting. They discuss whether to add a
new product to their product line and
advertising options on television and the
Internet.
In the third scene, senators in the United
States Congress gather to debate the important issues of the day: How can we ens
ure
that people are well fed and have access to

health care? What limits should the government place on businesses and internati
onal
trade? Who gets to control the Internet?
Economists look at the decisions made in
each of these scenes and study those decisions in greater detail.
A
Scarcity and Choice
The study of economics begins with the
idea that people cannot have everything
they need and want. A need is something like
air, food, or shelter that is necessary for
survival. A want is an item that we desire
BU
but that is not essential to survival. Because
people cannot have everything they need or
want, they must consider their options and
decide which choice will ll their needs best.
To look at the world economically, we
can focus on the decisions that people
make. You, for example, have to decide
what to do with your timego to a movie
or study for a test. Businesses have to
decide how many people to employ and
how much to produce. A city government
may have to decide whether to spend its
budget to build a school or a park.
Economics is the study of how people seek
to satisfy their needs and wants by making
choices. Because people act individually, in
groups (such as businesses), and through
governments, economists study each of
these groups. But why must people make
such choices? The reason is scarcity.
land
labor
capital
physical capital
human capital
entrepreneur
need something like
air, food, or shelter that
is necessary for
survival
want an item that we
desire but that is not
essential to survival
economics the study
of how people seek to
satisfy their needs and
wants by making
choices
goods physical objects
such as clothes or
shoes
services actions or

activities that one

person performs for
another
Scarcity
Living in a relatively wealthy country, many
Americans may nd it hard to understand
the idea of scarcity. Store shelves brim with
goods. Goods are physical objects such as
shoes and shirts. We have access to countless services. Services are actions or
activities that one person performs for another.
Haircuts, dental checkups, and tutoring are
I L D I NG
S
K
C ON CE P
T
Entrepreneurs To build understanding of the
concept of the entrepreneur, have students use a
web graphic organizer like the one at the right to
record details about how entrepreneurs bring
together the factors of production. Tell students
that a web shows a main idea and its supporting
details. Tell students to place the label
Entrepreneur in the central oval and to place
various factors of production in the other ovals.
Scarcity and the
Factors of Production
Objectives You may wish to call
students attention to the objectives
in the Section Preview. The objectives are reflected in the main headings of the
section.
Bellringer Ask students what
Graphing the Main Idea
EY
Section 1
Section Reading Support Transparencies A template and the answers for this graph
ic organizer
can be found in Chapter 1, Section 1 of the Section
Reading Support Transparency System.
comes to mind when they hear the
word scarce. Have students brainstorm a list of items that they think
might be scarce. Explain that in this
section they will learn that economists see examples of scarcity
everywhere.
Vocabulary Builder Have students
write definitions in their own words
for each key term listed in the

Section Preview. Students should

check their definitions by locating
the words and definitions in the section margins.
Lesson Plan
Teaching the Main Concepts L3
1. Focus All resources are scarce, so
people make choices to satisfy their
wants and needs. Ask students what
resources are scarce in their everyday
lives.
2. Instruct Discuss with students what
they already know about the subject of
economics. Suggest that they may be
familiar with economic ideas, even if
they do not know them as such.
Introduce the concepts of scarcity and
shortage, and describe the factors of
production. Then discuss the role of
entrepreneurs in an economy.
3. Close/Reteach Have students create
a poster that illustrates the three factors of production. Under each category,
have students write a brief
description of the factor.
Guided Reading and Review
Unit 1 folder, p. 2 asks students to
identify the main ideas of the section
and to define or identify key terms.
3

Chapter 1
Chapter
Section 1
scarcity limited
quantities of resources
to meet unlimited wants
L3
You may wish to have students add
the following to their portfolios.
During the colonial era, farmers, artisans, and some small business owners
dominated the economy of the United
States. Have students research the
early economic history of your community. What choices and decisions
did entrepreneurs and others in the
area make about land, labor, and capital in the early years of settlement? Ask
students to compare the uses of land,
labor, and capital then to todays uses.
Then have them write two advertisements: one for a business in the early
years and one for a business today.
Economics Assessment Rubric
Economics Assessment Rubrics folder,
pp. 67 provides sample evaluation
materials for a writing assignment.
all services. Indeed, we see ads everywhere
urging us to purchase goods and services.
Yet scarcity exists in all places, at all times.
shortage a situation in
which a good or
service is unavailable
De ning Scarcity
factors of production
land, labor, and capital;
the three groups of
resources that are
used to make all goods
and services
land natural resources
that are used to make
goods and services
labor the effort that
people devote to a task
for which they are paid
capital any humanmade resource that is
used to create other
goods and services
physical capital all
human-made goods
that are used to
produce other goods
and services; tools and
buildings

L2
Have students copy the section headings and write a sentence summarizing
key information under each. ELL
All of the goods and services we produce
are scarce. Scarcity implies limited quantities of resources to meet unlimited w
ants.
While one person might be able to buy
hundreds of basketballs or pencils or
pianos, no one can have an endless supply
of everything. Sooner or later, a limit is
always reached. At its core, economics is
about solving the problem of scarcity.
Scarcity Versus Shortages
Scarcity is not the same as a shortage. A
shortage occurs when producers will not or
cannot offer goods or services at the
current prices. Shortages can be temporary
or long-term. During the holiday season, a
customer may see an empty shelf on
Tuesday, but return on Friday to nd that
same shelf lled to over owing. Wars and
droughts can also create shortages that last
for many years.
Scarcity, in contrast, always exists
because our needs and wants are always
greater than our resource supply. Goods
and services are scarce because they are all
made from resources that are scarce.
Meeting NCEE Standards
Use the following benchmark activity
from the Voluntary National Content
Standards in Economics to evaluate
student understanding of Standard 1.
Explain how a high school seniors
decision to work 20 hours per week
during the school year could reduce her
lifetime income. Also, explain how an
increase in the legal minimum wage
aimed at improving the financial condition of some low-income families could
reduce the income of some minimum
wage earners.
While peoples needs and wants are unlimited, the resources available
to meet those wants are limited, or scarce. Which scarce resources were
used to produce the fruits and vegetables shown here?
$
Answer to . . .
Photo Caption Fertile land, water,
physical labor, and machinery are
among the scarce resources used to
produce these fruits and vegetables.
4
Land

Economists call the resources that are used

to make all goods and services the factors of
production, or factor resources. The factors
of production are land, labor, and capital.
Economists use the term land to refer to
all natural resources used to produce goods
and services. Natural resources are materials found in nature. They include fert
ile
land for farming and products that are in or
on the land, such as coal, water, and forests.
Labor
Another factor of production is labor. Labor
is the effort that a person devotes to a task
for which that person is paid. Labor
includes the medical aid provided by a
doctor and the tightening of a clamp by an
assembly line worker. It is an artists creation
of a painting or the repair of a television.
Capital
Capital
used to
The two
capital

is any human-made resource that is

produce other goods and services.
categories of capital are physical
and human capital.

Physical Capital
Human-made objects used to create other
goods and services are called physical
capital. (The term capital goods is a
synonym for physical capital.) Physical
capital includes buildings and tools. A shoe
factory building and all of the sewing
machines and other specialized machinery
for making shoes make up part of the shoe
companys physical capital.
Physical capital is an important factor of
production because it can save people and
companies a great deal of time and money.
A building is physical capital because it
helps workers do their work by providing
protection and space. Similarly, tools such
as tractors, conveyor belts, and pencils are
physical capital because they, too, help
workers produce a good or a service.
When we create or buy physical capital to
accomplish a job, we usually become more
productive. Suppose that your family of 6
Econ 101: Key Concepts Made Easy
Scarcity One of the key concepts in this section
is scarcity. Students often confuse scarcity with a
shortage. Remind students that shortages can be
either temporary or long-term. Scarcity, in contrast, always exists because a so
cietys needs and
wants are always greater than the supply of
resources.
Ask students whether they think that time can be

considered a resource. If they think that it is, ask

them to consider whether time is a scarce resource.
Have students create a chart that shows how, in a
typical weekday, they allocate the 24 hours available to them.

Chapter 1
Chapter
Figure 1.1 The Factors of Production
Land
All of the natural resources
that are used to produce
goods and services
Background
Entrepreneur
A person who assembles the
factors of production to create
new goods and services
Economics in History
Goods and Services
Labor
Any effort a person devotes
to a task for which that
person is paid
Capital
Any human-made resource
that is used to create other
goods and services
Land, labor, and capital, also known as the factors of production, are the inputs
, or
resources, used to create all goods and services.
Entrepreneurs What role do entrepreneurs play in producing goods and services?
people washes dishes by hand every day after
every mealbreakfast, lunch, and dinner
for a total of 21 meals per week. It takes 30
minutes per meal for two family members
working together to scrape, stack, wash,
rinse, dry, and put away the dishes. Thats 21
hours per week that could have been spent
on other more productive activities.
Now, suppose that your family decides to
buy a dishwasher that costs $400. Using the
dishwasher, it will take 15 minutes for a
single family member to clean up after each
meal. At this rate, it will take the entire
family only 5 1 hours per week to handle
4
this chore. The bene ts that your family
reaps from the free time will cover the cost
of the new dishwasher, which provides the
typical bene ts of physical capital:
1. Extra time Your family no longer has
to spend 21 hours per week doing the
dishes. Instead, the family gains 15 3 hours
4
each week to use for other activities.
2. More knowledge By learning how to
wash the dishes by machine, family
members learn more about using household

appliances in general. They can apply that

knowledge to the use of other labor-saving
devices, such as washing machines, dryers,
and microwaves.
3. More productivity
Because family
members now have extra time and extra
knowledge, they can use their resources and
labor to do additional chores or other activities that are bene cial to the family
.
human capital the
skills and knowledge
gained by a worker
through education and
experience
Human Capital
In addition to producing
physical capital, people can
invest in themselves. Human
capital is the knowledge and
skills a worker gains through
education and experience.
An economy requires both
physical and human capital to
produce goods and services.
Doctors use stethoscopes
and their schooling in order
to provide their services.
Assembly-line workers use
equipment as well as skills
acquired through training and
practice to produce goods.
In the News Read more about capital in
Humans Need Not Apply, an article in
The Wall Street Journal Classroom
Edition.
The Wall Street Journal
Classroom Edition
For: Current Events
Visit: PHSchool.com
Web Code: mnc-1011
Block Scheduling Strategies
Consider these suggestions to take advantage of
extended class time:
I Have students work in small groups to complete the first activity on p. 4. You
may wish to
arrange for a member of a local historical society
to talk to the class about the early history of your
community.
I Show the Economics Video Library segment
Groovin Business, about the founding of an
Internet retail music business. After viewing the
Section 1

segment, discuss the fact that this business was

started with very little land, labor, or capital. Lead
a discussion on the unique aspects of Internet businesses; then have students id
entify other businesses
that require little land, labor, or capital.
I Have pairs of students work through the Case
Study on Herbert Stein, p. 2 and complete the
Free Enterprise Activity in the Case Studies in
Free Enterprise folder, pp. 23. Ask students to
present their reports orally.
Andrew Carnegie, founder of
Carnegie Steel, was an entrepreneur
who was instrumental in turning
American steel manufacturing into a
powerful industry. In the years
between 1860 and 1900, steel
became a key factor of economic
development in the United States. It
was used in railroad tracks, bridges,
and skyscrapers. Using his business
sense, Carnegie wisely invested in
the expansion of Carnegie Steel by
utilizing new manufacturing technologies, such as the Bessemer
process and the open-hearth
process. By 1900 Carnegie Steel was
producing four million tons of steel
a quarter of the total United States
production for that year. In 1901
Carnegie sold his company to John
Pierpont (J. P.) Morgan, who had just
formed the United States Steel
Corporation. Carnegie then retired
and devoted himself to philanthropy.
Transparency Resource Package
Economics Concepts, 1A:
Scarcity and Factors of Production
Learning Styles Activity
Learning Styles Lesson Plans folder,
p. 7 asks student groups to create
diagrams about the factors of
production.
Typing in the
Web Code when prompted will
bring students directly to the
article.
For an additional article from The
Wall Street Journal Classroom
Edition, see the Source Articles
folder in the Teaching Resources,
pp. 35.
Answer to . . .
Building Key Concepts Entrepreneurs
assemble and manipulate the three
factors of production and coordinate their use, thus stimulating the
production of goods and services.

Chapter 1
Chapter
Section 1
FAS T FAC T
Guide to the Essentials
Chapter 1, Section 1, p. 2 provides
support for students who need additional review of the section content.
Spanish support is available in the
Spanish edition of the guide on p. 2.
Quiz Unit 1 folder, p. 3 includes
questions to check students understanding of Section 1 content.
If land, labor, and capital are
the essential ingredients for
creating all goods and services,
who pulls these resources
together? The answer is entrepreneurs. Entrepreneurs are
ambitious leaders who decide
how to combine land, labor,
and capital resources to create
new goods and services. They
are the individuals who take
risks to develop original ideas, start businesses, create new industries, and fu
el
economic growth.
You need not be Bill Gates of Microsoft
or Henry Ford to be considered an entrepreneur. An individual who opens a corner
food store and transforms it into a 10-store
supermarket chain is an entrepreneur.
After shing in sub-zero
temperatures in Labrador during
1912, a man named Clarence
Birdseye was astounded that his
frozen sh was tasty when he thawed
and cooked it weeks later. This
entrepreneur soon patented a quickfreeze machine and started his own
seafood company. The result? An
entire frozen foods industry was born.
Presentation Pro CD-ROM
Quiz provides multiple-choice
questions to check students understanding of Section 1 content.
Answers to . . .
Section 1 Assessment
1. Goods are physical objects (chairs,
bananas). Services are actions or
activities performed by one person for
another (mowing a lawn, teaching).
2. Economics seeks to solve the scarcity
problem, which exists because
resources are limited whereas needs
and wants are unlimited.
3. Scarcity always exists because
goods and services are produced
from limited resources. Shortages

can be temporary or long-term and

occur only when producers will not
or cannot offer goods or services at
current prices.
4. Land includes any natural resources
used to produce goods and services,
such as fertile soil or coal. Labor is
the effort that one person exerts for
another and for which the first person is paid. Capital is any humanmade resourc
e used to produce
goods and services.
5. Physical capital provides extra time,
increased knowledge, and/or greater
productivity.
6. Entrepreneurs decide how to combine factors of production to create
new goods and services.
7. Materials used to make the car are in
limited supply. Only so many workers
are available to assemble cars. The
land that the factory is on is part of a
fixed amount of land on Earth.
8. (a) capital (physical) (b) labor (c) land
(d) land (e) labor (f) capital (human)
9. You would need a place for your
business (land) as well as office help
and tutors (labor). You would need
economics textbooks and teaching
materials (physical capital) as well as
the experience of trained economics
teachers (human capital).
6
Entrepreneurs
Scarce Resources
entrepreneur
ambitious leader who
combines land, labor,
and capital to create
and market new goods
and services
Economists say that all goods and services
are scarce because the land, labor, and
capital used to create them are scarce.
Consider French fries. A typical portion of
French fries started as a potato in a eld in
Section 1 Assessment
Key Terms and Main Ideas
1. What is the difference between a good and a service?
2. Why is the idea of scarcity a starting point for thinking
economically?
3. How is scarcity different from shortages?
4. Describe the three factors of production.
5. What special advantages does physical capital offer?
6. What role do entrepreneurs play in the economy?
Idaho. Seven and one-half gallons of water

irrigated the half-foot plot where the potato

grew. Nurtured with fertilizers and protected
by pesticides, the potato was harvested,
processed, frozen, and then transported to
Seattle. In Seattle, it was fried in corn oil
from Nebraska, sprinkled with salt from
Louisiana, and eaten in a restaurant.
All of the economic resources, or factors
of production, that were used to create the
French fries are scarce. First, the quantity
of the land and water available for growing
potatoes is limited. Second, the labor available to grow the crop and to process
and
transport the potatoes is limited by the size,
time, age, and energy of a population.
Finally, because land and labor are limited,
the amount of physical capital available to
create the French fries, such as farm equipment, is also limited.
While we have been talking about French
fries, we could easily have been talking
about a pair of blue jeans or a new space
shuttle. No matter what good or service we
were to look at, we would discover that the
supplies of land, labor, and capital used to
produce it are scarce, and that each
resource has many alternative uses.
Progress Monitoring Online
For: Self-quiz with vocabulary practice
Web Code: mna-1015
9. Try This Leaving class today, you decide to start an
economics tutoring business. Your rst step is to get the
two categories of capital. Next you need to obtain the
other factors of production. Speci cally, what do you need
in terms of land, labor, and capital?
10. Critical Thinking Do you agree or disagree with the
following statement? Creating capital is like depositing
money in a savings account. You save now in order to
have more in the future.
Applying Economic Concepts
7. Critical Thinking Why might an economist look at
hundreds of cars moving along an assembly line and say,
There is an example of scarcity?
8. Decision Making Which factor of production is represented by each of the foll
owing? (a) an of ce building
(b) an assembly line worker (c) a tree used to make paper
(d) unused soil (e) an artist (f) a student
10. Agree: Capital allows you to have more time, gain
knowledge, and be more productive, thus creating
more goods or services. This is like interest earned
in a savings account. Disagree: Capital is unlike
interest because it is not earned; it is an outside
factor that allows growth.
PHSchool.com
For: Research Activity
Visit: PHSchool.com

Web Code: mnd-1011

Progress Monitoring Online
For additional assessment, have students access
Progress Monitoring Online at Web Code: mna-1015
Typing in the Web Code
when prompted will bring students directly
to detailed instructions for this activity.