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Scarcity, Choice and Opportunity Cost: Question 1

Syllabus 1.1, 1.2

Multiple choice AS 1 mark

Scarcity forces every economy to combine four types of resource, known as the factors of production, in order to produce goods and services. A friend tells you: "My aunt is putting $120,000 of capital into her new furniture workshop."

An economist listening to this would point out that, precisely speaking, only part of what is being described here counts as capital in the economic sense of the word.

Which of the following is the factor of production that economists define as capital?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall the economist’s definition of capital

In everyday speech, “capital” often just means money. Economists use the word much more narrowly: capital is a man-made (manufactured) resource used to produce further goods and services, things like machinery, tools, vehicles and buildings, rather than the money used to buy them. Money itself is not a factor of production; it is finance, a means of acquiring capital, labour or land, but it does not directly produce anything on its own.

Step 2: Identify what each part of the scenario represents

  • The $120,000 is finance. Money that will be used to acquire resources, but not itself a factor of production.
  • The saws, lathes, delivery van and workbenches are man-made goods that will be used, alongside labour, to produce furniture. This is capital.
  • Organising the workshop and bearing the risk of the venture is the role of enterprise (the entrepreneur).
  • The carpenters and delivery drivers supply labour, the human effort used in production.

Step 3: Rule out the other options

  • Option A mistakes the money itself for capital, when money is only the finance used to purchase capital goods.
  • Option C describes enterprise (organising production and bearing risk), which is rewarded with profit, not capital.
  • Option D describes labour (the carpenters’ and drivers’ effort), which is rewarded with wages, not capital.

Final answer

Capital is the man-made resource used to produce further goods (here, the saws, lathes, delivery van and workbenches) so the answer is option B.