FACTORS OF PRODUCTION

Natural and human resources are required in the production of goods and services. In economics,
these are referred to as factors of production / productive resources / factor inputs. They are land,
labor, capital, and entrepreneurship. Factor inputs can be bought and sold in their respective
factor markets. Production is made possible when some elements of all the four factors of
production are present.

The quantity and quality of production depends on the quantity and quality of factors of
production available. A main influence on any country’s total volume of production is the
quantity and quality of its productive resources. For example Japan has an educated and
technical workforce. Therefore it produces automobiles, electronic appliances etc. Pakistan has
fertile soil, unskilled and uneducated workers who work on farms. Therefore Pakistan produces
agricultural products.

Mobility of Factors of Production

It is possible to distinguish between two types of mobility. Geographical mobility refers to the
movement of factors of production from one place or area to another. Occupational mobility
refers to the movement from one use to another.

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 FOUR FACTORS OF PRODUCTION

LAND
These are the resources provided by nature and not by human beings. The word land is used to
describe all kinds of natural resources, such as farm lands, minerals, fishing grounds, etc. The
main service of land is the provision of space where production can take place. Land not only
refers to the site on which a factory is built or the area where farming is taking place, but also to
the natural resources in the widest sense such as coal or water. Land is said to earn an income or
reward called rent.
 Land is a necessary factor of production. It provides the site on which production takes
place
 Land is important because it is the final source of all primary products, such as
endowments of minerals, animal, and plant life, which provide the basic raw materials
for economic activities.
 With advances in knowledge and technology, land in itself becomes less important in the
production process.
 Land determines the type and extent of production.
 The availability of water in rivers, lakes and seas will also determine the character and
extent of production.

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 LABOR
By labor, we mean both the mental and physical effort contribution of workers to the production
process. Examples would include the physical effort of a coal miner and the mental effort of an
accountant. Labor is sometimes referred to as human capital. Labor earns a reward or income
called wages.
Labor Productivity is usually expressed as the number of units of output produced per person per
unit of time. Hence, it is a measure of efficiency. A high level of productivity indicates
efficiency and is regarded as significant in achieving economic growth (see later) and a higher
standard of living. There are several factors which influence a higher level of labor productivity:

 Improvements in organization such as more division of labor and economies of large-

scale production (see later).
 Personal characteristics of the worker, like age, physical. stamina, intellectual capacity,
emotional maturity, educational level, work experience and attitude towards work.
 Incentives play an important role in motivating the worker towards a higher level of
efficiency. This includes wage and non-wage incentives.
 The physical work environment also affects labor productivity
 The corporate culture of the organization - An organization’s culture is its values, norms,
attitudes, and beliefs. These shape the behavior of employees in an organization.

The mobility of labor varies. Some workers may find it difficult to move from one area to
another (geographical immobility) or some may find it difficult to switch from one type of job to
another (occupational immobility).

The causes of geographical immobility include:

 Differences in the price and availability of housing in different areas and countries.
 Family ties
 Differences in educational systems an different areas and countries
 Lack of information: people without jobs or in poorly paid jobs may stay where they are
because they are unaware of job opportunities elsewhere.

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  Restrictions on the movement of workers: for example, the difficulty of obtaining a work
visa in another country.

There are also a number of causes of occupational immobility of labor. Again, there may be a
lack of information about vacancies in other types of jobs. The main cause, however, is a lack of
appropriate skills and qualifications.

CAPITAL
The word capital is used to describe manufactured resources which are not required for their own
sake but to assist in the production of other commodities. It can also be defined as items used in
the production process that are human- made. They consist of such things as factories, machines,
railways, roads, power stations, docks etc. Capital earns an income or reward called interest.

Capital can be classified as either fixed capital or working capital.

a) Fixed capital: This is long lasting and consists of things which do not change their form in
the process of production. A manufacturing firm would describe its factory buildings and
machinery as fixed capital. For a farmer, fixed capital would compromise assets such as barns,
cowsheds, tractors, milking machines etc.

b) Working capital: Includes those things which are used up in the process of production; that
is, they are changed into some other form. A farmer’s seeds and fertilizers, a shoe manufacturer’s
stock of leather and a furniture maker’s supply of timber are good examples of working capital.
Firms also include in their working capital the stocks of money they hold for running expenses
e.g. buying raw materials, paying wages. Working capital is sometimes called circulating capital,
because it keeps moving and changing.

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Investment

Investment takes place when capital goods are produced.

 Gross Investment is the total value of the output of capital goods produced during a
given period of time - usually a year. But capital goods are always wearing out or
becoming outdated.
 Depreciation or capital consumption describes the extent to which a stock of capital
loses its value owing to wear and tear and obsolescence. (A machine is suffering from
obsolescence when it can be replaced by a far more efficient machine).
 Net Investment is the value of the extra capital goods made. It is equal to ‘gross
investment minus depreciation’. So if gross Investment is greater than depreciation, then
an economy’s stock of capital should increase.
 Capital goods have both geographical and occupational mobility. The degree of
mobility depends largely on the type of capital goods.
 Stock of capital can increase if there is an increase in investment (specifically net
investment). Investment may increase in an economy due to lowering of interest rates,
lower taxes, lower cost of production, and favorable economic environment.
 Efficiency of capital may increase due to technological advancements, changes in
techniques of production, availability of skilled labor to operate the machinery, etc.

ENTERPRISE
Enterprise is the willingness and ability to bear uncertain risks and to make decisions in a
business. The entrepreneur is the person who organizes the other factors of production, namely
land, labor and capital, into units of production called firms to achieve a certain purpose such as
making a profit. This will involve taking risks. Enterprise earns a reward or income called profit.
Entrepreneurs decide what to produce and how to produce it keeping consumer demand in mind.
Some risks of business can be insured against, but other risks have to be borne by the
entrepreneur. Supply of entrepreneurs may be influenced by factors such as:
 A rise in education

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 Reduction in corporation tax
 Increase in subsidies for businesses
 Reduction in the interest rates
 Privatization
 Economic boom
Enterprise is the most mobile factor of production. The skills involved, such as bearing risks and
organizing the other factors of production, can be applied in every industry, leading to
occupational mobility.

Activity: 1.4

An industry which uses a high proportion of labor compared with the proportion of other factors
of production used, for example capital employed is said to be labor-intensive. On the other
hand, an industry which uses a high proportion of capital/machinery compared with the
proportion of other factors of production used, for example labor employed is said to be capital-
intensive.

Factor substitution is when a firm is deciding to replace one factor of production with another.
A firm will want to combine its resources in the most efficient way to maximize overall
productivity for the minimum of costs. Some of the things to be considered are:
 Efficiency/productivity of the factor of production
 Cost of the factor of production

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  Type of the product (standardized vs. customized)
 Production process (mass-produced vs. personalized)
 Cost of installing and maintaining the (capital) equipment
 Cost of retraining the labor to use new machinery/equipment
 Labor disputes between trade unions and employers over potential job losses
 Strikes by workers which will lead to loss of production or output by firms

MOBILITY OF THE FACTORS OF PRODUCTION

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 HOW THE QUANTITY AND QUALITY OF FACTORS OF PRODUCTION CAN BE
INCREASED
Factor of How can factor quantity be increased?
production
Land  An increase in rents may persuade more
landowners to release their land into
productive uses
 New discoveries of fossil fuels, minerals
and other natural resources-and new
equipment and techniques-can improve
the amount it is possible to extract
 Making use of other previously unused
natural resources. For example, modern
technologies have enabled us to use the
sun, wind and other renewable resources
to produce energy. This is reducing the
amount of oil, gas and coal we need to
burn to produce electricity.
 Planting and growing more trees and
plants
 Recycling and re-using used vegetable
oil and engine oils, and metal and
wooden parts in durable consumer and
capital goods that we no longer use or
want
Labor  An increase in wages may persuade
more people to supply their labor to
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How can factor quality be
increased?
 Fertilizers and better
land management can
improve soil conditions
allowing more crops to
be grown
 New technologies can
improve the resilience
of plants to drought and
insect infestations
 Reducing the use of
chemicals in farming
which can pollute water
courses
 Using organic and more
humane animal farming
methods can improve
the quality of crops,
meat and milk produced
 Training and education
can improve workforce
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 firms skills and the amount,
 An increase in the population of working range and quality of
age goods and services
 Improvements in healthcare reduces the people can produce
number of days people are absent from
work due to sickness and help people to
live and work for longer
Capital  A decision by producers to produce more  Advances in technology
capital goods have improved, and
 An increase in interest payments will continued to improve,
increase the amount of capital investors the speed and accuracy
are willing to supply to firms of modern equipment
Enterprise  An increase in the prices consumers are  More and better training
willing to pay for goods and services courses for people to
may increase profits and encourage more become entrepreneurs
people to start firms  More and better
 A fall in the number of paid jobs business advice and
available and a rise in unemployment support for new
may result in more people starting up entrepreneurs
their own businesses instead

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 TOPICAL QUESTIONS

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