Text 6. Resources are scarce

The four economic resources that economies use to produce goods and services are land, labour, capital, and entrepreneurial ability. These resources are limited in availability, or «scarce», and participants in an economy pay for their use. These payments are called resource payments.¹ Specific types of payments are made for the use of each resource. Resource payments made to the owners of land are called Premiums paid to the contributors of labour are wages and salaries. Interest in­come, in a strict economic sense, is the resource payment for the use of capital. The resource payment made for the use of entrepreneurial ability is known as profit.

The first category, land, refers to more than just acreage. As a resource, the term «land» includes the qualities and materials above, on, and below the surface: warm, sunny climates needed for food production, mineral and ore deposits, oil supplies, and even plant and animal life. Some components of the land resource hardly seem scarce. For instance, power derived from the light and heat of the sun seems inexhaustible. Other land resources are renewable: we can replant trees cut down for wood products, clean and recycle water polluted in manufacturing processes, and restock fish taken from our lakes and rivers. Other resources, how­ever, such as minerals, are nonrenewable.

The second scarce resource is labour. Labour includes both mental and physi­cal exertion. When a banker extends a line of credit to a small business, approves an automobile loan, or opens a new account, the banker’s actions constitute la­bour. When a professor gives a lecture or grades an exam, when a carpenter builds a house or a contractor paves a new highway, or when a songwriter writes a song and a singer sings it — all of these events are included in the calculation of labour. The only activity commonly considered labour that economists exclude from their definition is the managerial function of a business. Management is usually considered part of the entrepreneurial resource.

The third scarce resource is capital. Economists use this term in a different fashion from bankers. By capital, economists do not mean money, but the goods and services used to produce articles of consumption. When economists discuss capital goods, they mean products such as tools or machinery, and delivery chan­nels such as bridges or roads — products that are used to generate other products or facilitate consumption. The premium paid to the owner of capital goods is called interest income. You should be careful not to confuse the economic mean­ing of this term with the banking definition of interest income as a return for cer­tain types of deposits at assigned maturities.

The fourth factor of production is entrepreneurial ability. Some authors in­clude entrepreneurial ability in the labour category. However, the entrepreneurial function in business is so important that it deserves separate study. Of the four scarce resources, entrepreneurial skill may be the most important. Entrepreneur­ial ability is the driving force behind all business ventures. The entrepreneur must identify a need and seek an opportunity to fill it. The entrepreneur must obtain and combine the other factors of production in a way that produces a good or service. The entrepreneur must market and sell this product or service to the consumer. Above all, the entrepreneur must risk money, time, and reputation on the success of his or her venture.