Introduction to Factors of Production

Factors of production refer to those goods and services, which are required to produce other goods and services. In other words, those factors or inputs that are used in the production process are called factors of production. All the things that are needed in the production of goods and services are called factors of production.

Production is not possible without factors of production. For instance, raw supplies, machines, tools, capital, labor, etc. are used for the production of goods i.e. books, paper, bags, pens, etc. these factors or things are called factors of production. A factor of production is also called factor input.

In economics, factors of production are generally grouped into four types i.e. land, labor, capital, and organization.

Land

Land in general notion refers to the surface of the earth. But in economics, land refers to all the gifts of nature that can be used in the process of production. It means land refers to all things such as the surface of the land, mine, minerals, atmosphere, sea, forest, air, sunlight, etc.

The land is a chief and essential factor input that is freely made available by the natural world. Production is impossible in the absence of land. However, the land is passive or not active. Though the land is a gift of nature, it may not be freely available when it is used or owned by human beings. It means, when economic value is created by man, another person should pay rent to use the land.

Features of Land

There are some attributes of land and that can briefly explain as below;

The land is a gift of nature

The land is gifted by nature in free for living things. That means, human beings neither create nor destroy the land. Living things need not pay any rent for their natural state.

The land is fixed in supply

The supply of land is always fixed in nature. It neither can be increased nor decreased. It means that we human beings it is not possible to put in even an inch to the existing supply of land. Only its fertility can be changed.

Land is indestructible

Land cannot be destroyed. Human beings can destroy the quality of land but not the quantity of land fertility can be changed by human beings but the size of land remains constant.

The passive factor of production

The land is the passive factor of production. In the process of production, land doesn’t take any active participation. It becomes productive only when labor and capital are applied to it.

Immobile factor

Human beings cannot move land from one place to another place like other factors. Only the value of land can be transferred.

Differ in quality

All land is not of the same quality. It is fertile somewhere and sandy in other places. Output or production is more in high fertile land than in less fertile land.

Labor

Labor is a physical or mental effort of a human being in the process of production to earn wages or income. Work is done by porter, treatment service by a doctor, service of lawyers, engineer, etc. are an example of labor. Labor is an active factor of production which uses land and capital to make production possible.

The demand for labor is a derived demand. Demand for labor largely depends on the marginal productivity of labor the wage rate. The supply of labor depends on the wage rate, population growth, expenses on education, training, etc.

Features of Labor

There are some attributes of labor and that can briefly explain as below;

Labor is an active factor of production

Labor mobilizes other factors of production like land, capital in the process of production of goods and services. Generally, other factors of production like land and capital are the passive factor which is useless without the use of labor.

Labor is perishable

Unlike goods, energy, time, and effort of labor cannot be stored for future use. It means, labor perishes forever, it is not renewable.

Labor is a mobile factor

Labor alone is a factor that is mobile or moves. It means labor can be moved from one place to another place. For example, the labor of Kathmandu can travel to Tokyo or another place to give his services. However, labor is less mobile compared to capital because a laborer is bound by love, family, society, etc.

Labor is an inseparable factor from laborer

Other factors of production can be separated from their owner. But, laborers cannot be separated from labor. The labor himself or herself has to go to the specified place to deliver his labor.

Differ in the efficiency

Some labor may be more capable and efficient to produce more quantity of goods with high quality than others. Different laborers have different capacities of working, experience, skill, knowledge, training, place, environment, etc. Due to varying degrees of efficiency, there are differences in wages and salaries that the labors get.

Inelastic supply in the short run

The supply of labor cannot be increased immediately. Labor is a workforce. A child after birth requires at least 15/16 years growing as a labor force. Thus in the short run labor is an inelastic factor to supply.

Labor has weak bargaining power

Labor is perishable-means he or she cannot store his or her labor for the future. So labor has cannot refuge the current opportunity. There are other different factors also that make the bargaining power of labor weak.

Capital

In economics, all man-made goods which are used for further production of wealth are called capital that includes tools, machinery, building, raw material, railways, etc. In a simple sense, capital may be known as wealth. But in economics, all goods regarded as wealth also are capital if that is used in the production of goods and services. Thus only active wealth is capital.  So we can say that all capital is wealth, but all wealth is not capital. There are mainly two types of capital. One is physical capital such as buildings, machinery, and equipment and another is human capital such as skills and training that labor uses.

Features of Capital

There are some attributes of capital and that can briefly explain as below;

Man-made factor

Capital is the saving of people invested in physical capital goods. It means that capital is produced by human efforts as well as other means of production. Thus every type of capital such as machines, buildings, roads, factories, etc. is produced by man.

The passive factor of production

Capital will not be active until it is not used by the active labor force in the production process. Capital itself cannot produce goods and services. Laborer and organization are necessary to use the capital for further production of goods and services.

Most mobile factor

Most of the capitals can be easily transferable from one place to another place. Capital can be easily taken where it requires for production. It is not bounded by any visible and invisible things.

Capital is depreciable

If we use the capital in production for a long time, then it wears and tears. As a result, its original valve decreases and ultimately it may be useless even after repairing. The valve of machinery items diminishes every year. Thus, capital is depreciable.

Supply of capital is elastic

Unlike land, capital is a more elastic factor than other factors. The volume of capital can be increased in a short period compared to other factors. For example, labor and organization cannot be changed immediately and easily whereas capital such as machinery, tools, vehicles, equipment, etc. is possible to change in a short period.

It depends upon technology

The amount of capital depends upon the technology employed by a nation. The more progress is in the country’s technology the more capital is produced in that nation.

Entrepreneurship or Organization

It can be defined as the social unit of people that is structured and managed to meet a collective goal. The organization is that factor of production, which organizes land, labor, and capital to produce goods and services. The chief task of the organization is to handle main function production. The person who coordinates organizes various resources and produces goods and services is called an entrepreneur. An entrepreneur starts a business/production to earn a profit or to take benefit. An organization is an association of people to achieve a certain goal. Organizations may be of different types, such as sole trading organization, partnership, Joint Stock Company, etc.

Features of Entrepreneurship or Organization

Collection of people

An organization is a gathering of persons contributing their hard work and efforts towards certain common goals. For this, every person associated with the organization is assigned to a particular job.

Structure

The organization has a different structure for the division of work. In such a structure, there is a specification of labor from the top to the bottom.

Technology

It is a process of transferring the inputs of the organization into the desired output. It may be both labor-intensive and capital-intensive depending upon the availability of resources.

Environment

An organization runs in an open environment. That means, it is affected by economic, political, and socio-cultural factors.

Risk management and return

An organization is established to earn profit but there is a risk of loss due to uncertain future, such as natural calamities, change in government policy, change in fashion, etc. all such risks and uncertainties are born and faced by the organization.

Direction, supervision, and control

Apart from organizing the production, an organization exercises close steady supervision. It also gives direction and keeps controlling to achieve the goal.

Innovations

The organization is also responsible for innovation. It implies a variety of things. It means the introduction of a new method of production, the discovery of new raw materials, the introduction of a new commodity, etc.

Conclusion

Factors of production refer to those goods or services which are required to produce other goods or services. They are also known as inputs or agents of production. They are traditionally classified into four categories as land, labor, capital, and organization. The production of any goods and services is not possible without the contribution of such factors. The return received by the owners of factors of production is the main source of income for them. Thus, factors of production are essential elements that cooperate with each other in the procedure of production. Labor is the most active factor and is responsible for the operation of others in production. The organization is there to manage all and do tasks for generating profit.

References

Agarwal, H.S. (1998). Microeconomic Theory. New Delhi: Konark Publishers Pvt. Ltd.

Mankiw, N.G. (2014). Principles of Economics. New York: Harcourt Brace College Publishers.