Glossary
Capital
Man-made resources used in production, such as machinery, tools, and buildings. Its payment is interest.
Example:
A factory takes out a loan to buy new automated assembly lines, paying interest on the capital investment.
Derived Demand
The demand for a resource that arises from the demand for the product it helps produce.
Example:
If consumers suddenly want more vegan burgers, the demand for plant-based protein ingredients will experience derived demand.
Entrepreneurship
The ability to combine the other factors of production, innovate, and take risks to create new businesses or products. Its payment is profit.
Example:
A startup founder's innovative idea and risk-taking in launching a new app are examples of entrepreneurship, aiming for profit.
Factor Market
A market where businesses purchase the resources (factors of production) they need to produce goods and services from households.
Example:
When a tech company hires software engineers, they are participating in the factor market for labor.
Factors of Production
The basic resources used to produce goods and services: land, labor, capital, and entrepreneurship.
Example:
A pizza shop uses flour (land), chefs (labor), ovens (capital), and the owner's business acumen (entrepreneurship) as its factors of production.
Labor
The human effort, both physical and mental, used in the production of goods and services. Its payment is wage.
Example:
The hourly wage paid to a barista for making coffee is the payment for their labor.
Land
Natural resources used in production, including raw materials and the physical space for operations. Its payment is rent.
Example:
A farmer pays rent for the fertile soil they use to grow crops, which is considered land in economics.
Law of Diminishing Marginal Returns
A principle stating that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease.
Example:
Adding too many chefs to a small kitchen will eventually lead to diminishing marginal returns, as they start getting in each other's way and productivity per chef falls.
Marginal Product (MP)
The additional output produced by hiring one more unit of a variable input, such as labor.
Example:
If hiring a fourth baker increases the bakery's output from 100 to 115 loaves, the marginal product of that fourth baker is 15 loaves.
Marginal Resource Cost (MRC)
The additional cost incurred by a firm when hiring one more unit of a resource.
Example:
If a construction company hires an extra worker for 25 is the marginal resource cost for that worker.
Marginal Revenue Product (MRP)
The additional revenue generated by hiring one more unit of a resource, calculated as Marginal Product multiplied by the product's price.
Example:
If an additional worker produces 5 extra widgets, and each widget sells for 50.
Profit Maximization (MRP = MRC)
The rule that firms follow to maximize profits by hiring resources up to the point where the marginal revenue product of the resource equals its marginal resource cost.
Example:
A firm will continue hiring software developers as long as the revenue generated by the last developer (MRP) is greater than or equal to their salary (MRC), stopping when MRP = MRC for profit maximization.
Total Product (TP)
The total quantity of output produced by a given amount of inputs.
Example:
A bakery with three bakers produces 100 loaves of bread in a day; this is their total product.