DELHI PUBLIC SCHOOL JODHPUR

SESSION – 201 8 -19

EXTRA READING
SUBJECT – GEOGRAPHY
CLASS – IX
CHAPTER – VILLAGE PALAMPUR – 2
Factors of Production: - Factors of production is an economic term that describes the inputs that
are used in the production of goods or services in order to make an economic profit. The factors
of production include land, labour, capital and entrepreneurship. These production factors are
also known as management, machines, materials and labour, and knowledge has recently been
talked about as a potential new factor of production.
Factors of production include any resource needed for the creation of a good or service. At the
core, land, labour, capital and entrepreneurship encompass all of the inputs needed to produce a
good or service. Land represents all natural resources, such as timber and gold, used in the
production of a good. Labour includes all of the work that labourers and workers perform at all
levels of an organization, except for the entrepreneur. The entrepreneur is the individual who
takes an idea and attempts to make an economic profit from it by combining all other factors of
production. The entrepreneur also takes on all of the risks and rewards of the business. Capital is
made up of all of the tools and machinery used to produce a good or service.
The Four Factors of Production
The factors of production are resources that are the building blocks of the economy; they are
what people use to produce goods and services. Economists divide the factors of production into
four categories: land, labour, capital, and entrepreneurship.
1] Land: - The first factor of production is land, but this includes any natural resource used to
produce goods and services. This includes not just land, but anything that comes from the land.
Some common land or natural resources are water, oil, copper, natural gas, coal, and forests.
Land resources are the raw materials in the production process. These resources can be
renewable, such as forests, or non - renewable such as oil or natural gas. The income that
resource owners earn in return for land resources is called rent. Land stands for all
the natural resources available to create supply. It includes raw property and anything that
comes from the ground. It can be a non-renewable resource. That includes commodities such as
oil and gold. It can also be a renewable resource, such as timber. Once man changes it from its
original condition, it becomes a capital good. For example, oil is a natural resource, but gasoline
is a capital good. Farmland is a natural resource, but a shopping center is a capital good. The
income earned by owners of land and other resources is called rent.
The United States is blessed with an abundance of easily accessible natural resources. These
include fertile land and water. Many countries are covered with mountains or desert, making it
expensive to use the natural resources. It has miles of coastline, lots of oil, and a moderate
climate. That's an advantage over Canada. It has similar natural resources, but they are frozen
for most of the year. Global warming is beginning to change that, making Canada one of the
winners of climate change.
2] Labour: - The second factor of production is labour. Labour is the effort that people
contribute to the production of goods and services. The value of the workforce depends on
workers' education, skills, and motivation. It also depends on productivity. That measures how
much each hour of worker time produces in output. The reward or income for labour is wages.
Labour resources include the work done by the waiter who brings your food at a local restaurant
as well as the engineer who designed the bus that transports you to school. It includes an artist's
creation of a painting as well as the work of the pilot flying the airplane overhead. If you have
ever been paid for a job, you have contributed labour resources to the production of goods or
services. The income earned by labour resources is called wages and is the largest source of
income for most people.
The United States has a large, skilled, and mobile labour force that responds quickly to
changing business needs. It also benefits from productivity increases due to technological
innovations. On the other hand, the U.S. labour force faces increasing competition from other
countries. That's one reason why American jobs are being outsourced. The Bureau of Labour
Statistics measures the U.S. labour force. It releases the current U.S. jobs report the first Friday
of each month. The report includes the employed and the unemployed. The employed only
include people over 16 who worked in the past week. It excludes the active military and any
residents of an institution. The unemployed are those who actively looked for a job in the past
month. All the other jobless are not members of the labour force.
3] Capital: - The third factor of production is capital also known as capital goods. Think of
capital as the machinery, tools and buildings humans use to produce goods and services. These
are man-made objects like machinery, equipment, and chemicals that are used in production.
That's what differentiates them from consumer goods. For example, capital goods include
industrial and commercial buildings, but not private housing. A commercial aircraft is a capital
good, but a private jet is not. Some common examples of capital include hammers, forklifts,
conveyer belts, computers, and delivery vans. Capital differs based on the worker and the type
of work being done. For example, a doctor may use a stethoscope and an examination room to
provide medical services. Your teacher may use textbooks, desks, and a whiteboard to produce
education services. The income earned by owners of capital resources is interest.
Money is not capital as economists define capital because it is not a productive resource. While
money can be used to buy capital, it is the capital good (things such as machinery and tools) that
is used to produce goods and services. When was the last time you saw a carpenter pounding a
nail with a five dollar bill or a warehouse foreman lifting a pallet with a currency note? Money
merely facilitates trade, but it is not in itself a productive resource. The income earned by
owners of capital goods is called interest.
The United States is a technological innovator in creating capital goods, from airplanes to
robots. That's why Silicon Valley is a critical comparative advantage in the global market. The
U.S. Bureau of Economic Analysis measures capital goods production with the monthly durable
goods orders report. It reports on total capital goods order, shipments, and inventory. It also
strips out defence and transportation.
4] Entrepreneurship: - The fourth factor of production is entrepreneurship. An entrepreneur is
a person who combines the other factors of production - land, labour, and capital - to earn a
profit. The most successful entrepreneurs are innovators who find new ways produce goods and
services or who develop new goods and services to bring to market. Without the entrepreneur
combining land, labour, and capital in new ways, many of the innovations we see around us
would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. Entrepreneurs are a
vital engine of economic growth helping to build some of the largest firms in the world as well
as some of the small businesses in your neighbourhood. Entrepreneurs thrive in economies
where they have the freedom to start businesses and buy resources freely. The payment to
entrepreneurship is profit.
As goods and services are scarce and the factors of production used to produce them are also
scarce. Scarcity is described as limited quantities of resources to meet unlimited wants. Consider
a pair of denim blue jeans. The denim is made of cotton, grown on the land. The land and water
used to grow the cotton is limited and could have been used to grow a variety of different crops.
The workers who cut and sewed the denim in the factory are limited labour resources who could
have been producing other goods or services in the economy. The machines and the factory used
to produce the jeans are limited capital resources that could have been used to produce other
goods. This scarcity of resources means that producing some goods and services leaves other
goods and services unproduced. Entrepreneurship is the drive to develop an idea into a business.
An entrepreneur combines the other three factors of production to add to supply. The most
successful are innovative risk-takers. One reason small businesses do so well it's relatively easy
to get funded compared to other countries. Others raise money on the stock market by
issuing an initial public offering. Shares in these companies are called small-cap stocks.
Who Owns the Factors of Production
Ownership of the factors of production depends on the type of economic system and society.

Factors of Production Socialism Capitalism Communism

Are owned by Everyone Individuals Everyone
Are valued for Usefulness to people Profit Usefulness to people

A Quiz: - Name That Resource. I will say the name of an item and you will identify it as one
of the four possible resources that form the factors of production: land, labour, capital, or
entrepreneurship.
Importance of the Factors of Production: -
1] The concept of the factor of production is of great importance in modern economic analysis.
It is used in the theory of production in which the various combinations of factors of production
help in producing output when a firm operates under increasing or decreasing costs in the short
run, and when the returns to scale increase or decrease in the long run. Further we can also
know, how the least cost combination of factors be obtained by a firm.
2] The theory of cost of production also depends upon the combinations of factors employed in
business and the prices that are paid to them. From the point of view of the theory of costs of
production, factors of production are divided as fixed factors and variable factors. Fixed factors
are those whose costs do not change with the change in output, such as machinery, tube-well,
etc. Variable factors are those whose quantities and costs change with the change in output.
3] Larger outputs require larger quantities of labour, raw materials, power, etc. So long as a firm
covers the costs of production of the variable factors it employs, it will continue to produce even
if it fails to cover the costs of production of the hired factors, and incurs a loss. But this is only
possible in the short run. In the long run, it must cover the costs of production of both the fixed
and variable factors. Thus the distinction between fixed and variable factors is of much
importance for the theory of firm.
4] Factors of production are also divided into divisible and indivisible factors. Factors are
divisible when their inputs can be adjusted to the output. Labour is said to be divisible when the
number of labourers may be reduced in keeping with the output of the firm.
Divisible factors lead to the economies of scale for a firm by adjusting the number of factors to
the output of the firm. Indivisible factors are those which are available in minimum sizes, and
are lumpy, such as machines, entrepreneur, etc.
5] They also lead to economies of scale, but at a faster pace. When a firm expands, the returns to
scale increase because the indivisible factors are employed to their maximum capacity. More
output can be had by using the existing machines up to their full productive capacity.
6] Lastly, the concept of factor of production is used in explaining the theory of factor-pricing.
For this purpose, factors of production are divided into specific and non-specific. A factor of
production which is specific in use earns a higher reward than a non-specific factor. This also
solves the problem of distribution of income to the various resource-owners.