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 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. 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. 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.
Land is the economic resource encompassing natural resources found within an economy. This resource includes timber, land, fisheries, farms and other similar natural resources. The reward for land is rent. A main characteristic of land is that it is a free gift of nature in that land is not produced or man-made and so we have to accept it as it is. Land is also limited in area or fixed in supply - land surface of the world is remaining unchanged even though some can be reclaimed from the sea.
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. A main characteristic of capital is that it depends 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.
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. The reward for entrepreneurship is that of profits.
Characteristics of Entrepreneurship
- 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.
- Risk bearing - the foundation of entrepreneurship is the willingness to take on risk arising out of the creation and implementation of new ideas.