Factors of production Flashcards
Definition of factors of production
Factors of production are the resources necessary to produce any product. They are also known as the means of production, agent of production and factor inputs. No production is possible without the factors of production. Traditionally, they have been divided into land, labour, capital and enterprise.
What is land?
In economics, land does not only refer to soil but to all natural resources such as minerals, fossil fuels, the soil, deserts, rivers and mountains, oceans and fish in the sea, sunlight, rainfall and so on. The reward for land is rent.
Land as a factor input can be broadly classified into renewable and non renewable resources
Renewable resources are those which do not get depleted or exhausted. They are unlimited in supply and they can be used over and over again. They can be easily replaced or renewed after use. For example, solar energy, man-made forest, fish in the sea if there is no overfishing or through fish farm.
Non renewable resources are those which are likely to get depleted or exhausted. Such resources are limited in supply and they cannot be replaced once they get exhausted such as coals, oils, minerals, rainforest and fish in the sea due to overfishing
What is labour?
Labour refers to all human resources. It is the mental and physical contribution of a person towards production. Labour refers to the effort of the person and not to the worker. Hence, a cleaner, a doctor and a teacher are all considered as labour. The reward for labour is wages.
Labour can be broadly classified into skilled and unskilled labour.
Skilled labour refers to the effort of those having specific skills, qualifications, training, or experience like a teacher, lawyer and professional football player
Unskilled labour refers to the effort of those having no specific skills, training and experience such as cleaner and helpers.
The education, training and experience that workers have gained are referred as intellectual or human capital. This refers to skilled workforce of the country.
What is capital?
Capital refers to all man-made resources. They are all those resources which have been made to produce other goods and services. It includes machinery, equipment, softwares and technology. The reward for capital is interest
What is enterprise?
Enterprise is a form of human capital. The enterprise is provided by the entrepreneur. He is the person who assembles land, labour and capital to start any business. The entrepreneur fulfils 2 major functions namely risk-taking and decision making. The reward for enterprise is profits.
Large business are mostly owned by a group of shareholders who receive a share of the profit known as dividends. However, there are certain businesses or enterprises which are not-for-profit organisations such as NGOs and SOEs which do not aim for profit maximisation.
Importance of land
Land as a factor of production is of immense importance. It is the original source of all material wealth. The economic prospect of a country depends largely upon the riches of its natural resources. Land provides raw material for production to take place. While labour and capital, land cannot be easily replaced as they are natural resources. All aspects of economic life is influenced by the natural resources and consequently they influence the standard of living of a nation.
Importance of labour
Production requires human interaction. Capital cannot operate by itself. It requires human beings to operate them
Labour does the thinking which capital cannot. Labour can react promptly to changes while capital react in the way they have been programmed.
Most services are better provided by labour. Workers can use emotion and metal power to satisfy wants. They can customise their services whenever there is a need for special care, touch and attention. They can provide “made to measure” services
Labour conduct research and development leading to innovation. Workers have taste and preferences which are effective in satisfying wants such as designing of clothes and footware, where there is a need for human touch
Marketing and selling are mostly labour oriented and workers can be made more flexible and versatile to adopt to changes in the work environment such as work from home and online teaching following Covid-19 pandemic.
Importance of Capital
Modern production processes are more and more complex. The factor of production capital is becoming more important as there is a need for capital goods that can produce more, faster and better. Firms are making greater use of the lastest, most advanced technology and machines which can match speed with efficiency.
Labour has its limits while machines can operate on a 24/7 basis. They are more and more productive leading to bulk production and lower unit cost. This is why modern firms are more and more capital-intensive.
The more complex is the production processes, the greater will be the use of the factor of production capital. In developed countries, it is easier to have capital than labour. Technology can also move faster between countries and they are user-friendly
Importance of enterprise
The enterprise provides goods and services to satisfy human wants. It is responsible for organising the other factors of production to promote efficiency and increase output
Risk taking is fundamental to the factor of production enterprise and this distinguishes the entrepreneur from the other workers. Enterprises create jobs and contribute towards national income. They may create social changes, bring community development and address environmental challenges. They have even created goods that never existed such as the internet and mobile phones. Entrepreneur can also undertake investment leading to economic growth and through such investment they are able to stimulate the economy.
They can even motivate workers to outdo one another and become more efficient and productive.
The application of “business-know-how” , expertise and acumen rely upon the entrepreneurs. A minor business decision may have a major impact upon the organisation. The willingness to take risk, be innovative and imaginative rest upon the entrepreneurs.
Entrepreneurs can also be inspirational leaders having the leadership skills, ideas and sense of initiative together with a vision to make things happen. Some of them have even made extra ordinary things which have changed the world like Bill Gates, Steve Jobs, Mark Zuckerberg, Jeff Bezos and Elon Musk
However taking too much risk may lead to the failure of the organisation. In their endeavour to make too much profits, some businesses have failed. Others have had a dubious or fraudulent activities leading to business failures like Enron.
What is mobility of factors of production and differentiate between 2 types of mobility
The mobility of factors of production refers to the ability of the factor to move or to change. This can be from 1 place to another or from one production to another. Thus mobility of the factors of production can be viewed in terms of the geographical mobility and occupational mobility.
Geographical mobility is also known as regional mobility or locational mobility. It refers to the ability of a factor to move from one place to another. If the factor of production can be moved easily from one place to another, it is said to be geographically mobile else it is said to be immobile.
Occupational mobility of the factor of production refers to its ability to change use or purpose or occupation. If this is possible then its is said to be occupationally mobile else it is said to be occupationally immobile.
