Economic Resources

Economic Resources

Economic resources are the things people use to attempt to satisfy their needs and wants. They can be divided into three categories: labor, capital, and natural resources.


Labor – the human economic resources

Labor is human effort, both physical and mental. People use their time and effort to produce things that are useful to themselves or others. Examples of labor are teachers, bankers, construction workers, steelworkers, plumbers, entrepreneurs, and managers.

Economists use various terms to describe different types of labor. A white-collar workertypically performs work that does not involve manual labor, is paid an annual salary instead of hourly wages, and is expected to dress with some formality. Examples of white-collar workers are business executives, stockbrokers, insurance salespeople, bankers, and lawyers. The origin of the expression is that men in these professions traditionally wear a white dress shirt, suit, and tie to work. White-collar workers are often associated with the service sector, which is the area of the economy that does not result in the production of a tangible commodity. A tangible commodity is a product that can be touched or held, such as an apple, a sweater, or a house.

A blue-collar worker typically performs work that involves manual labor, is paid hourly wages, and dresses in clothes that may become heavily soiled. Examples of blue-collar workers are automobile mechanics, garbage collectors, and construction workers. The origin of the expression is that men in these professions often wear a uniform with a blue shirt. Blue-collared workers are often associated with the manufacturing sector, which is the area of the economy that produces tangible commodities.

The Rust Belt is the heavily industrialized area of the upper Midwestern U.S. that contains older factories, many of which are closed. Manufacturing jobs in industries such as automobiles, steel, and coal mining used to be a significant source of employment in Michigan, Indiana, Ohio and Pennsylvania. Over the last few decades, Americans have increasingly preferred to buy manufactured products from cheaper foreign producers.

It is normal for there to be changes in the types of industries that are the most successful in a particular economy. Silicon Valley is a region southeast of San Francisco, California, which is known for its computer and other high-technology industries. These American industries flourished in the 1990s, but have faced increasing foreign competition in recent years.

There is a relationship between education, skills, training, and productivity. Productivity is the amount of output that can be produced in an hour of a worker’s time. Increases in education, skills, and training are usually associated with increases in productivity. As people become more productive, businesses are usually willing to pay them more. To illustrate this concept, consider two salespeople. If one person sells $50,000 worth of a company’s products per year while another person generates $1 million of sales per year, who is more deserving of higher pay? Salespeople are usually paid a commission, which means they are paid based on the value of their sales. Consequently, companies usually pay salespeople more when they generate more sales.

This relationship between education and productivity also explains why most students attend college. As people become better educated, they tend to become more productive. More productive people tend to earn higher incomes. Consequently the most frequently cited reason for attending college is to enable people to obtain a better, higher-paying job than would occur in the absence of the education.

Education, skills, and training are sometimes referred to as human capital.

Special Types of Labor in Business

The business world is divided into several functional areas, such as entrepreneurship, management, marketing, finance, and accounting. Entrepreneurship is the invention of new products, the improvement of existing products, or the delivery of products in better or more efficient ways. Management is the allocation of economic resources. Marketing is the process of informing society about products in an attempt to convince potential consumers to purchase them. Finance is the management of money, credit, and other financial assets.Accounting is the preparation and inspection of financial reports. Each of these functional areas of business has a special type of labor associated with it.

An entrepreneur is someone who invents a new product that satisfies a want or need of society, improves an existing product, or provides a product in a better or more efficient way. One way to become wealthy is to become a successful entrepreneur. Mark Cuban, the owner of the National Basketball Association’s Dallas Mavericks, acquired his wealth by being a successful entrepreneur. Cuban co-founded Broadcast.com, which provided streaming multimedia on the Internet, in 1995. The Internet company Yahoo! Inc. purchased Broadcast.com in 1999 for $5.7 billion. Successful entrepreneurs are usually highly motivated, creative leaders with some specialized knowledge that can be used to help satisfy the wants or needs of society.

A manager is someone who allocates economic resources. Successful managers are efficient in their use of labor, capital, and natural resources. Economic efficiency occurs when a society obtains the largest possible amount of output from a given set of resources. Skillful management is a key component of successful businesses. Examples of the importance of management are provided by professional sports. The head coach of a baseball team is called the manager and the major league baseball executives in charge of hiring players are called general managers. Four men have even been elected to Baseball’s Hall of Fame based solely on their achievements as general managers: Ed Barrow, Larry MacPhail, Branch Rickey, and George Weiss.

A marketer is someone who promotes the purchase or sale of a product. The marketing process includes the conception, pricing, promotion, and distribution of ideas, goods, and services. These are often referred to as the marketing mix or the four Ps of marketing: product (conception), price, promotion, and place (distribution). Businesses paid an average of $2.4 million for a 30 second commercial during the 2005 Super Bowl. The willingness of some firms to pay such large sums for advertising indicates the importance of marketing to the success of businesses.

A financier is someone who engages in large-scale financial affairs. A financier is sometimes called a capitalist if he or she invests in a business by providing it with significant money or other financial assets. It is not uncommon for people who develop new products to lack the financial resources to market their ideas. Financiers may provide these entrepreneurs with the financial capital to develop and market their products in return for a share of the revenues or profits from future sales.

An accountant is someone who prepares and inspects the tax reports and other financial records of individuals or businesses. Financiers and other business executives rely on accountants to provide an accurate portrayal of the financial condition of a company. Accountants also assist individuals in the preparation of personal financial reports, such as income tax returns for federal, state, and local governments.


Capital – the manufactured economic resources

In its broadest sense, capital is anything that increases productivity. Capital allows workers to produce more output with an hour of labor. Economists divide capital into four categories: physical capital, human capital, technology, and financial capital.

Physical capital is anything tangible and man-made that makes workers more productive. Examples of physical capital are computers, cars, pencils, microwave ovens, factories, and machinery. For example, a postal worker delivering mail to houses that are far apart can do it more efficiently with a truck rather than walking. In an hour of time, the mailman with a vehicle could deliver to more homes than the postal worker on foot.

Education and training also make most workers more productive. Human capital is the education, skills, and training that workers acquire that make them more productive. For example, skilled workers can construct more framing for a new building in an hour of time than the same number of unskilled workers. Similarly, a professionally trained nurse may be able to assist more patients in an hour at a hospital emergency room than someone without that education.

Technology is the knowledge and methodology of means of production. For example, sweaters can be knitted by hand or by factory machines. And the machines can be operated by people or controlled by computers. At a give point in time, some countries may have access to technologies, such as computer-controlled machinery, that are not available in other parts of the world. The adoption of new technologies often leads to an increase in productivity.

Financial capital is the money or other financial assets used to purchase the physical capital, human capital, and technology that make workers more productive. When a business considers increasing its physical capital, for example by buying machinery or building a new factory, it may not have enough money to pay for the entire purchase. Consequently, a business may need to raise financial capital in order to purchase physical capital. For relatively small purchases of physical capital, businesses may be able to use retained earnings as the source of financial capital. Retained earnings are the portion of a company’s profits that are not distributed to the owners of the business. For relatively large purchases of physical capital, businesses may borrow financial capital. The most common example of this is a business loan from a commercial bank. Corporations have two other options for raising financial capital, however. Corporations can issue corporate bonds, in which they borrow money directly from the public without using commercial banks as financial intermediaries. A bond is a financial asset that represents a loan from the purchaser of the bond to the issuer of the bond. Purchasers of bonds are lending money to the issuers of the bonds. Corporations also can raise financial capital by selling additional shares of stock. A stock is a financial asset that represents a share of ownership of a corporation. The owners of stock are called stockholders. A dividend is the share of corporate profit that is distributed to each stockholder.

The word capital is often used to refer to human capital, physical capital, technology, or financial capital. The correct meaning of the word is determined by the context of its usage.


Natural Resources – the natural economic resources

A natural resource is anything provided by nature that can be used to satisfy human needs and wants. Economists sometimes refer to natural resources as land. However, as a category of economic resources, land also includes anything nature provides in the air or water, on land, or under the earth. Examples of natural resources are soil, water, trees, minerals, animals, sunlight, and air.

Some natural resources are renewable and others are nonrenewable. A renewable resourceis capable of being replaced in a relatively short period of time. Examples of renewable natural resources are the sun, wind, forests, fish, oxygen, and fresh water. A nonrenewable resourceeither cannot be replaced or its replacement requires an extremely long period of time. Examples of nonrenewable natural resources are minerals and fossil fuels, such as oil, coal, and natural gas.[i]

It is possible for renewable resources to become nonrenewable if they are mismanaged by society. Plants and animals become nonrenewable if they are allowed to become extinct. Forests can become nonrenewable if they are clear-cut. Fresh air and water can become nonrenewable if they are damaged by pollution. Soil can become nonrenewable if society uses damaging agricultural practices. Many societies ask the government to help protect renewable resources from becoming nonrenewable.