Man’s infinite wants, his innate desire to have more, leads to scarcity. Scarcity is a situation in which there are only a limited number of resources available to produce goods and services.
Resources are known as the factors of production (the inputs used in the production process to produce output).
There are four factors of production:
Land is all the natural resources on the planet. Land includes oil, gold, rocks, forests, fish etc.
Workers are inputs and could be skilled or unskilled.
Man-made aids used by labour in the production process. Capital includes machines, buildings, computers, telecommunications, roads etc.
Risk-taking by an individual or group who combine the other factors of production in search of profit. In the movie Ghostbusters (starring Bill Murray and Dan Akroyd), 3 unemployed parapsychology professors take a risk and set up a paranormal investigations and eliminations business.
Because there exists only a finite amount of resources and yet an infinite amount of wants, a choice must be made over production. This is the basic economic problem, choosing how to allocate resources between alternative uses. A society (or individual) must choose what to produce, how to produce it and who to produce for. After making a choice, the decision makers face an opportunity cost. Opportunity cost is the next best alternative foregone. Choosing to produce some goods means the production of some other goods cannot happen. Thus, economics is the study of choices, the study of resource allocation.