What are Factors of Production?
Factors of production – in simple words means the factors that are used for producing any product or service. This includes the resources which are necessary for the manufacturing of products. Factors of production are also known as the building blocks of the economy.
In economics, factors of production mean the use of required inputs for the production of goods or services to make an economic profit.
Types of Factors of Production
Economists like Adam Smith, David Ricardo, and Karl Marx make great research related to the primary factors of production and identify land, labour, and capital as production factors.
As per modern economists, the following are the factors of production.
The Land is the first factor of production. The land is where crops are cultivated. It consists of natural resources like coal, zinc, and other useful minerals. These natural resources play a key role in the production process.
The land is considered a factor in various forms of natural resources such as agricultural land, commercial real estate, etc. Only the land is not considered a factor of production, all the natural resources that are generated from the piece of land are included as factors.
A group of economist’s states that economic value is generated from land and its natural resources. This increases the productivity of the company. The importance of the land value can be determined based on Industry. For instance, the sugar industry is fully dependent on the land for a raw material called sugarcane. While a computer manufacturing company can start with zero investment of land.
Labour is the efforts and hard work given by an individual for the production of goods and services. For instance, a worker giving his efforts for constructing a building or a worker working in the manufacturing company of clothes gives his hard work to produce clothes of good quality and design.
Early economists said that “Labour” is the primary requirement of economic value.
There are two types of Labor:
Labour giving human efforts and having the particular skills to complete any work is said to be skilled labour. They are being trained as per required work and are thus, paid higher wages. These workers bring more than just effort and hard work.
For instance, an accountant working in a company analyzing and managing the accounting data with his intelligence and accounting skills.
Uneducated workers are those who have no skill regarding work to be done in the factory is said to be unskilled workers/labourers. They are working without any skill and are paid according to their time devoted and efforts given to their work.
For example, a waiter working in a restaurant is paid less than a receptionist working in a hotel.
Due to differences in skills and intelligence, entrepreneurs can bargain and pay fewer wages as much as they can to their workers. Thus, labor plays a vital role in factors of production as rich countries having good human capital have increased their efficiency and productivity.
In Economics, Capital = Money
Money is not said to a factor of production because it is not involved in the process of production directly. Instead, it supports the production process and helps the owners of the company to purchase land, capital goods, assets, pay wages, etc.
For Instance, the money need for machinery purchased for manufacturing a television is said to be capital.
Economists say that "Capital is the primary driver of value."
During depression or any economic failure, the company went through losses, and in such a situation, they cut off their capital expenditure to make stable profits. While in a situation like economic expansion, the company used to invest more and more in capital assets for the development and expansion of the business profits.
Capital is the most important factor of the business from starting up an entity to its maturity level and then winding it up. It is that part of economics that is used as per the market conditions.
Types of capital goods:
- Business Capital
Personal capital: Money used for personal use such as the purchase of a personal car to transport a family is said to be personal capital.
Business capital: Money used to purchase plants and machinery for the expansion of business is said to be business capital.
Entrepreneurship is the combination of all the factors of production into a product or service for the economic market. Entrepreneurship is the fourth factor of production.
One of the best examples of the entrepreneur was "Konosuke Matsushita". He is the person who is responsible for changing the mindset of his employees ‘to think like an entrepreneur, not as a hired hand.’ Due to his efforts, he became the creator of various brands including Panasonic.
Examples to Understand Factors of Production More Clearly
For a farmer, factors of production are
- Land: The land which is used for agriculture.
- Labor: There might be people who help him out or he himself works hard to plough so that the seeds sown are used for further process
- Capital: The amount used for the purchase of assets such as axe, seeds, tractors, instruments used to plough the fields.
- Entrepreneur: In this case, anyone can be an Entrepreneur, he himself, or any other person above him. The owner of the land or the person who is the owner of the process or idea.
Another best example is Facebook
- Land: Initially no land was needed. But later the data centre was required for which the land was the most important factor.
- Labor: Initially only Mark Zuckerberg himself was working on his own idea of this social network. But as of date, some 45,000 employees are working with Facebook and it keeps increasing yearly.
- Capital: The very first investment on this was US$500,000 from Peter Thiel.
- Entrepreneur: Mark Zuckerberg is the Entrepreneur of this big Social media network. It was a big risk when he started this. The success of this business depends on the ideal time of any individual if spending on that activity.
Therefore, it is said that Entrepreneurship is one of the key roles of production without which no other factor will be useful as the hiring of Productive human resources, arranging capital, and purchasing of land will not be possible without an entrepreneur.
Ownership of Factors of Production
It is presumed that the ownership lies with households. They further lend or lease such ownerships to entrepreneurs and organizations. Though, is a theoretical construct and is rarely practised. The ownership for factors of production varies with the exception of labor that is entirely based on industry and economic system.
For example, a real estate firm owns significant parcels of land. On the other hand, retail corporations or shops need to lease land for extended periods of time. Similarly, capital can also be owned or leased from another party. Labor, under no circumstances, is owned by firms. Their transaction with firms is based on wages.
Technology's Role in the Production
Technology plays a vital role in the process of production. New technologies emerging in the market making production easier and more efficient. Technologies are referred to as both software and hardware. Increasing the use of technology in the production process makes it efficient and more productive.
For instance, the invention of robotics in the world and the use of robots in the production process improves the potential output and productivity.
Another best example is the self-serve restaurants where a machine called "kiosks" is used which in return cut off the labor cost of most of the companies. Thus, reducing the labor cost and increasing profit makes a good economy of technologies.
TFP i.e. total factor productivity also known as "Solow residual" measures remaining output that is not accounted for from the four production factors such as an increase in technological process and equipment which are applied in production and making the economy advance. Because of this reason, many economics consider TFP as the main reason for economic growth in many countries. So, in the country where more total factor productivity exists, there will be potential growth in their economy also.
Context and Applications
The topic is significant in the professional exams for both undergraduate and postgraduate courses, especially for:
- B. Com (Bachelor of Commerce)
- BBA (Bachelor of Business Administration) in Finance
- MBA (Master of Business Administration) in Finance
Want more help with your economics homework?
*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Factors of Production Homework Questions from Fellow Students
Browse our recently answered Factors of Production homework questions.