Production involves the creation of goods and services by using scarce resources. Producers must exchange the income they earn for the scarce resources they need to enable them to produce. Therefore, both parties, producers and consumers, must exchange something they have for something others want.

There are four types of scarce resource used in the process of production.

Land and natural resources

This includes the land on which production is located as well as the resources contained within the land, such as metals, minerals, and oil. The environment – the air, sea, rivers, and forests – is also a scarce resource.

Human capital

This includes the value of human skill and physical effort that is available to an economy, and is more commonly referred to as labour.

Real capital

This includes all man-made assets which have been created to help produce goods and services, such as machinery and equipment. It also includes stocks of raw materials waiting to be used before they become goods and serves. The creation of capital is calledinvestment.

Enterprise

Enterprise is supplied by the entrepreneur who has two crucial roles:

1.      Combining the other factors in such a way that goods and services can be produced in the most efficient way.

2.      Taking risks associated with the potential loss of assets or with making commercial losses.

Scarce resources are also called factors of production. All production requires the input of scarce resources.