Factors of Production
Topic Seventeen

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Factors of Production

The factors that are used in production are those resources used to produce goods and services. There are four main factors of production which are land, labour, capital and entrepreneurship.

Labour

Labour represents the human capital available to transform raw or national resources into consumer goods. Human capital includes all able-bodied individuals capable of working in the economy. This factor of production is a flexible resource as workers can be allocated to different areas of the economy for producing consumer goods or services. Human capital can be improved through training or educating workers. The reward for labour is wage.

Characteristics of Labour

A main characteristic of labour is that it is perishable plus it cannot be separated from the labourer. For example, it is not possible to bring the ability of the banker at the bank but leaving the banker at home. Still another characteristic of labour is that it is inelastic in supply. This means that the supply of labour cannot be increased or decreased if the need requires. For example, if a country has a scarcity of a particular type of workers such as dentists, their supply cannot be increased within a day or even a month or a year. Another characteristic of labour is that it is the beginning and the end. Land and capital alone cannot make production. Production can be started only with the help of labour. It means labour is the beginning of production. Goods are produced to satisfy human needs. When people consume goods, production comes to an end. Therefore, labour is both the beginning and the end of production.

Land

Land is the economic resource encompassing natural resources found within an economy. This resource includes timber, land, fisheries, farms and other similar natural resources. Land is usually a limited resource for many economies. Although some natural resources, such as timber, food and animals are renewable, the physical land is usually a fixed resource. Nations must carefully use their land resource by creating a mix of natural and industrial uses. Using land for industrial purposes allows nations to improve the production processes for turning natural resources into consumer goods. The reward for land is rent.

Characteristics of Land

  • Land is free gift of nature- land is not produced or man-made and so we have to accept it as it is.
  • Land is limited in area or fixed in supply - land surface of the world is remaining unchanged even though some can be reclaimed from the sea.
  • Land is permanent - land as a factor of production is not easy to destroy. The other factors are destructible but land cannot be completely destroyed.
  • Land lacks mobility - land cannot move physically from one place to another. It lacks geographical mobility,

Capital

Capital has two economic definitions as a factor of production. Capital can represent the monetary resources companies use to purchase natural resources, land and other capital goods. Capital also represents physical assets that individuals and companies use when producing goods or services. These assets include buildings, factories, equipment, vehicles and other similar items. The reward for capital is interest.

Characteristics of Capital

Capital, as a factor of production, has certain special characteristics. They are:

  • Dependence on savings - capital can be obtained by postponing the present consumption and transferred to saving; this means that when people save money, it becomes capital because firms borrow these savings to purchase capital which includes equipment. Therefore, capital is a direct result of savings.
  • Man-made - capital is not a natural resource; it is a man-made resource over a period of time.
  • Variability - capital is variable in that it can be increased or decreased according to individuals’ will and wish.
  • Depreciates - machines in an industry are also known as capital. When machinery is continuously used, it is subject to normal wear and tear which means that it depreciates.
  • Mobility - of the four factors of production, capital can mobile very easily. Land cannot move from one place to another. Labour moves but not in a perfect sense. However, capital moves from one place to another very easily.

Functions of Capital

Capital as a factor of production is necessary for the following functions in any industry:

  • Capital is the source of wages to labourers.
  • Capital acts as an incentive and helps to improve the productivity of land and labour.
  • Capital is needed to purchase raw materials; without capital, purchase of raw materials and capital formation such as infrastructure and machines is not possible.

Entrepreneurship/Enterprise

Entrepreneurship/enterprise is considered a factor of production because economic resources need to be transformed into consumer goods. Entrepreneurs usually have an idea for creating a valuable good or service and assume the risk involved with transforming economic resources into consumer products. In essence, entrepreneurship is the process of starting a business for the purpose of transforming resources into finished products and/or services. The reward for entrepreneurship is that of profits.

Characteristics of Entrepreneurship:

Entrepreneurship is characterized by the following features:

  • Economic and dynamic activity - entrepreneurship is an economic activity because it involves the creation and operation of an enterprise with a view to creating value or wealth by ensuring optimum utilization,
  • Related to innovation - entrepreneurship involves a continuous search for new ideas and forces an individual to continuously evaluate the existing modes of business operations so that more efficient and effective systems can be evolved,
  • Profit potential - profit is the level of return to the entrepreneur for taking on the risk of developing an idea into an actual business venture;
  • Risk bearing - the foundation of entrepreneurship is the willingness to take on risk arising out of the creation and implementation of new ideas.

Importance or Functions of Entrepreneurship/Enterprise:

Entrepreneurship is important for the following reasons:

  • Development of managerial capabilities - the most important benefit of entrepreneurship is that it helps in identifying and developing managerial capabilities of entrepreneurs.
  • Creation of organisations - entrepreneurship results in the creation of organisations.
  • Improving standards of living – by creating productive organisations, entrepreneurs help in making a wide variety of goods and services available to the society which results in higher standards of living for the people.

Productivity of Factors of Production

Productivity is a measure of output per unit of input. Therefore, the following is a measure of productivity of all factors of production:

Figure 1

Example: A restaurant in Korea has 4 employees who produce 28 pizzas on average in one night while a restaurant in New Zealand has 7 employees who produce 63 pizzas on average in the same night.

Figure 2

The restaurant in New Zealand is more productive as it can produce more pizzas per unit of labour which is 9 pizzas as compared to 7 in the case of the restaurant in Korea.

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