Five factors of production essay
Factors of Production : Land, Labour, Capital and Entrepreneur | National Income
Some of the important factors of production are: (i) Land (ii) Labour (iii) Capital (iv) Entrepreneur.
Whatever is used in producing a commodity is called its inputs. For example, for producing wheat, a farmer uses inputs like soil, tractor, tools, seeds, manure, water and his own services.
All the inputs are classified into two groups—primary inputs and secondary inputs. Primary inputs render services only whereas secondary inputs get merged in the commodity for which they are used.
In the above example, soil, tractor, tools and farmer’s services are primary inputs because they render services only whereas seeds, manure, water and insecticides are secondary inputs because they get merged in the commodity for which they are used. It is primary inputs which are called factors of production.
Primary inputs are also called factor inputs and secondary inputs are known as non-factor inputs. Alternatively, production is undertaken with the help of resources which can be categorised into natural resources (land), human resources (labour and entrepreneur) and manufactured resources (capital).
All factors of production are traditionally classified in the following four groups:
It refers to all natural resources which are free gifts of nature. Land, therefore, includes all gifts of nature available to mankind—both on the surface and under the surface, e. g., soil, rivers, waters, forests, mountains, mines, deserts, seas, climate, rains, air, sun, etc.
Human efforts done mentally or physically with the aim of earning income is known as labour. Thus, labour is a physical or mental effort of human being in the process of production. The compensation given to labourers in return for their productive work is called wages (or compensation of employees).
Land is a passive factor whereas labour is an active factor of production. Actually, it is labour which in cooperation with land makes production possible. Land and labour are also known as primary factors of production as their supplies are determined more or less outside the economic system itself.
All man-made goods which are used for further production of wealth are included in capital. Thus, it is man-made material source of production. Alternatively, all man-made aids to production, which are not consumed/or their own sake, are termed as capital.
It is the produced means of production. Examples are—machines, tools, buildings, roads, bridges, raw material, trucks, factories, etc. An increase in the capital of an economy means an increase in the productive capacity of the economy. Logically and chronologically, capital is derived from land and labour and has therefore, been named as Stored-Up labour.
An entrepreneur is a person who organises the other factors and undertakes the risks and uncertainties involved in the production. He hires the other three factors, brings them together, organises and coordinates them so as to earn maximum profit. For example, Mr. X who takes the risk of manufacturing television sets will be called an entrepreneur.
An entrepreneur acts as a boss and decides how the business shall run. He decides in what proportion factors should be combined. What and where he will produce and by what method. He is loosely identified with the owner, speculator, innovator or inventor and organiser of the business. Thus, entrepreneur ship is a trait or quality owned by the entrepreneur.
Some economists are of the opinion that basically there are only two factors of production—land and labour. Land they say is appropriated from gifts of nature by human labour and entrepreneur is only a special variety of labour. Land and labour are, therefore, primary factors whereas capital and entrepreneur are secondary factors.
Five factors of production essay
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Why are the factors of production important to economic growth?
Real economic growth only comes from increasing quality and quantity of the factors of production, which consist of four broad types: land, labor, capital and entrepreneurship. Saving and discovery are the two basic ways to improve or increase the factors of production. Saving occurs when present consumption is delayed, and those resources are instead used to enable capital investment. Discovery can include technique or process discovery, technological discovery or resource discovery.
Defining a Factor of Production
The St. Louis Fed defined the factors of production as «what people use to produce goods and services.» Improvement along these factors enables producers to create more and cheaper economic goods. This, in turn, allows consumers to earn more for their labor services and to pay less for existing goods.
Land and labor are the earliest factors of production; humans have always mixed their labor with land and natural resources. Income from land and labor are called rent and wages, respectively.
The third factor, capital, includes all those resources or tools that humans use to improve their productivity. (For more, see «Why Is Productivity an Important Concept in Economics?») Common forms of economic capital include machinery, tools, and buildings. Income from capital resources is normally called interest.
Entrepreneurship is a little more controversial. Most classical economic models largely ignore it, or consider it a subset of labor. So Why do some economists consider entrepreneurship to be a factor of production? Because it can increase the productive efficiency of a firm. However, some economists don’t consider it a separate good, but rather the purposeful combination of the other three factors. An entrepreneur can identify new opportunities among the other factors without necessarily controlling them. Payment to entrepreneurship is called profit.
Creating Economic Growth
The purpose of economic organization – including all labor – is to create things that people value. Economic growth occurs when more and cheaper goods can be created. This raises the standard of living by lowering costs and raising wages.
As Parmenides, a Greek philosopher, famously quipped, «Nothing comes from nothing.» Growth can’t be legislated or wished into existence; it needs to be produced.
Economic growth results from better factors of production. This process is clearly demonstrated when an economy undergoes industrialization or other technological revolutions; each hour of labor can generate increasing amounts of valuable goods.