Reading: Lesson 4 - Economic Wants

4.4.A - Economic Wants

1. SATISFYING OUR ECONOMIC WANTS

1. All societies face the problem of trying to satisfy their citizens’ wants for goods and services. These wants include goods and services that are necessary, as well as those that are desired but limited. Different societies have developed different systems for producing and using goods and services. The area of study that relates to producing and using goods and services that satisfy human wants is called economics. At the beginning of this chapter, you will study the concepts that are essential to understanding any economic system. You will then learn about the world’s economic systems, along with political-economy systems. The chapter concludes with fundamentals of our economic system (capitalism) and factors related to economic growth.
   
2. Businesses help to make the economic system work by producing and distributing the particular goods and services that people want. A good place to begin the study of economics is with the two broad categories of wants found throughout an economic system: economic wants and non-economic wants. People have many wants. The economic system, however, operates on the basis of economic wants—the desire for scarce goods and services. People want material goods, such as clothing, housing, and cars. They also want services, such as hair care, medical attention, and public transportation. Items such as these are scarce because no economic system has the resources to satisfy all the wants of all people for all material goods and services at all times. People also have non-economic wants. Non-economic wants are desires for non-material things that are not scarce, such as sunshine, friendship, and happiness.
   
3. The goods and services that people want have to be produced. Clothes must be made. Homes must be built. Personal services must be supplied. And as you learned in the opening scenario, the Guevara family expects their customers to want fruit, vegetables, and other basic foods.
   
4. Utility is the ability of a good or a service to satisfy a want. In other words, a good or a service that has utility is a useful good or service. Something is not useful, however, unless it is available for use in the right form and place and at the right time. As a result, four common types of utility exist: form, place, possession, and time. Definitions of the four types of utility, with examples, appear above, in the Figure below. 
   

   
   

5. Anyone who creates utility is a producer. Producers are entitled to a reward for the usefulness that they add to a good or service. Physicians are entitled to a reward for the usefulness of their medical services. The price you pay for a pen includes a reward for the manufacturer who made the pen, the shipping company that delivered it to the merchant, and the retailer who made it possible for you to buy the pen at the time you wanted it.
   
6. In creating useful goods and services, a producer combines four basic resources. These resources, called factors of production, are land (natural resources), labor, capital goods, and entrepreneurship. Because government provides many services that are essential to the operation of a business, economists may list it as a fifth factor of production. Some essential services provided by government are streets and highways, police and fire protection, and courts that settle disputes.
   
7. The extent to which a country is able to produce goods and services is, in part, determined by the natural resources that its land provides. Natural resources are anything provided by nature that positively contributes to the productive ability of a country. The productive ability of the United States, for example, depends on its soil, minerals, water and timber resources, and climate.
   
8. Labor is the human effort, either physical or mental, that goes into the production of goods and services. In today’s world of technology and special equipment such as computers, physical effort may be less important than mental effort—knowing what tasks to complete and how to complete them—when it comes to the production of some goods and services. A part of labor is human capital, the accumulated knowledge and skills of human beings—the total value of each person’s education and acquired skills. In a highly technological world, the need for human capital has increased significantly. 
   
9. To produce goods that people want, producers need capital goods. Capital goods are buildings, tools, machines, and other equipment that are designed to transform resources into other goods but that do not directly satisfy human wants. A robot on a car assembly line is an example of a capital good. The robot does not directly satisfy human wants. Instead, it helps make cars, using natural resources, that do satisfy human wants. Capital goods allow the production of goods in large quantities which, in turn, should decrease production costs and increase the productivity of labor.
   
10. For the production of goods, more is needed than the mere availability of natural resources, labor, and capital goods. An individual—or group of individuals—must take the risks involved in starting a business and plan and manage the production of the final product. Entrepreneurship, the fourth factor of production, brings together the other three factors—land (natural resources), labor, and capital goods. By starting and managing a business, Juan and his father are acting as entrepreneurs.
    

2. CAPITAL FORMATION

1. The production of capital goods is called capital formation. Capital goods, such as buildings and equipment, are needed to produce consumer goods and services. The pickup truck that Juan uses to deliver farm products to the store is a capital good. Unlike capital goods, consumer goods and services are those that directly satisfy people’s economic wants. The foods that Juan’s father sells to customers are consumer goods. Any group is capable of producing a fixed quantity of goods and services at any one time. As a result, total production is divided between capital goods and consumer goods and services. When the production of consumer goods and services increases, the production of capital goods decreases. On the other hand, when the production of consumer goods and services decreases, the production of capital goods increases. New capital goods must be made—capital formation—in order to add to the total supply and to replace worn-out capital goods. Capital formation takes place, for example, when iron is converted to steel and then is used to produce the tools and machinery (capital goods) needed to make cars rather than to produce the cars themselves (consumer goods).
   
2. When productive resources are used for capital formation, it becomes possible to produce more consumer goods. For example, when robots and other tools and machinery are created for making trucks, it is then possible to increase the future production of trucks. However, using steel, labor, and management to produce tools and machinery (capital goods) means that these same resources cannot also be used for automobiles (consumer goods). The near-term result is that consumers have fewer automobiles to buy. But, because the tools and machinery were made, consumers will have more automobiles to buy in the future. Developing countries often use large portions of their resources in capital formation. China for example, used its economic resources to obtain capital goods to produce consumer goods for export. Many developing nations take this first step before they satisfy their own consumers’ desire for consumer products.