Scarcity is the basic problem in economics. All that humans want exceeds the amount of limited resources that the world provides. All of the goods and services that a society desires cannot be provided within the economy or the world as a whole. Within scarcity, the consumer has to make a decision between two products, and that decision is based upon the consumer's opportunity costs. Scarcity is often caused by the inefficient distribution of the world's resources.
Returns in economics are the distributions or payments awarded to the various suppliers of the factors of production.
• The factors of production are: land (the total area in which to conduct production), labour (the ability to produce production), capital (the facilities and capabilities needed for production), and management/entrepreneurship (which is the organization needed to effectively produce).
Land- Land is the natural resources found in a country or area. These resources are classified mainly as primary goods that can be used in trade or the production of secondary goods. Some examples of natural resources are forests (to produce wood, plants, medicine ect), water (for drinking or power ect) and land (for crops or living area or recources of crust ect).
Labour- Labour is the human resources that are required for production. The physical and mental talents people contribute to the production of goods. As technology has advanced, human and machine labor have switched places in use, so machine labor is also counted.
Capital- Capital is a production of goods man-made factor of production that can be used as inputs such as a factory, technology or machinery that assists in the manufacturing of goods.
Entrepreneur- Entrepreneurs are the people who come up with the ideas that put the other three factors of production together to create goods, and they are often responsible for the success of this new business.
Wages are the return for labor—the return to an individual's involvement (mental or physical) in the creation or realization of goods or services. Wages are realized by an individual supplier of labor even if the supplier is the self. A person gathering mushrooms in a national forest for the purpose of personal consumption is realizing wages in the form of mushrooms. A payer of wages is paying for a service performed by one or more individuals and sees wages as a cost. Although wages seem to be very apparent, real wages are often misconstrued due to inflation. During inflation wages become sticky, so it is hard to raise or lower it. Workers don't know that they have sticky wages so they still do the same amount of work, but for less money until they find out later on and the wages return to the equilibrium level.
In Classical Economics, rent was the return to an "owner" of the land. In later economic theory this term is expanded as economic rent to include other forms of unearned income typically realized from barriers to entry. Land ownership is considered to be a barrier to entry because land owners make no contribution to the production process. Rent plays a big part in opportunity cost, which is another big barrier that everyone faces. They simply prevent others from using that which would otherwise be useful.
The Classical economists referred to the fee paid for the use of money or stock as "interest", declaring this to be a derivative income. Interest is also something that can be earned in a savings account at a bank. Interest is the return for capital. although interest raises the value of an original deposit. Inflation and Interest are inversely related, if Inflation increases, then Interest decreases, and vice-versa. Interest can be seen in a variety of scenarios affecting our economy: credit cards, mortgage on a house, and loans taken out for business and personal purposes.
In Classic economics profit is the return to the proprietor(s) of capital stocks (machinery, tools, structures). If I lease a backhoe from a tool rental company the amount I pay to the backhoe owner it is "interest" (i.e. the return to loaned stock/money).
Profit is the difference between the production the wages that would have been required excavating by hand, and the smaller amount of wages required using the machines, and from this profit "interest" is paid. Essentially you get more out than you put in. (Don't just count currency when thinking about profit, keep in mind things regarding opportunity cost.) Profit can also be negative if more money is lost than is gained. For example, you invest $100 in a lemonade stand, and only make $75 total from it's services, you'd have negative profit.
Profit Maximization Rule
Profit maximization is the process by which a firm determines the price and output level that returns the greatest profit.
Profit is maximized by producting the quantity of output MR=MC or (marginal revanue)=(the change in total revanue).