FACTORS OF PRODUCTION
In our introductory lesson, we learnt that economic
resources are goods and services that go with a price – what is paid for or can
be paid for. Now, by what means are these economic resources (goods/services)
produced? By using factors of production!
So, having discussed the meaning of Economics and its basic
concepts, we turn to discuss, briefly, the factors of production (More on
Production will be considered in a later post)
As just stated above, every good and service useful to us would
have undergone production. So production is at the heart of the process of
satisfying human wants.
Before we discuss the
factors of production, a definition of production, productivity and being
productive is necessary
Production,
Productivity and Being Productive
Production is the creation of goods and services.
Or put another way, production is the process of transforming inputs into
outputs.
The inputs are the factors of production, and are tangible
resources such as raw materials (land); money and technology (capital); and
intangible resources such as ideas, knowledge (labour and entrepreneur – human resources)
and the outputs are semi- or finished goods and services.
If provision of service is also production, then the service
activities of bring goods to final consumer is production – which is where
production of goods is said to have reach its final stage – it is
completed.
An individual, a firm, a factory, a machine or a system that
creates goods/services is said be productive.
And productivity is the
measure of the efficiency of an individual, a firm, a factory, a machine in the
production of goods/services. Productivity is calculated thus:
OUTPUT
INPUT
This formula also indicates average product.
Illustration
30 employees produce 90,000 units of goods; calculate the
productivity (average product) of the employees.
Productivity (average product) = 90,000 units/30 = 3,000
unit
Types of
Production
The three types of production are primary,
secondary and tertiary
production.
Primary Production
This is the extraction of raw material from land. Raw
materials include natural resources extracted from the gift of nature such as
crude oil, gold, silver, etc. and resources cultivated by man such as
agricultural produce. Examples of primary production are mining, fishing,
farming, etc.
Secondary Production
This is conversion of raw materials into semi-finished and
finished goods. Secondary production is therefore manufacturing and
construction.
Tertiary Production
This is provision of service, such as teaching,
transportation, financial services, etc.
Note: Primary and secondary production have to do with production of goods; while tertiary production has to do with provision of services.
Factors of Production
The factors of production are land, labour, capital and
entrepreneur.
Land
This is not just soil surface, but includes the air, sea and
all the resources in them. The reward for land as a factor of production is rent.
Characteristics/Features
of Land
(i) Land is fixed
in quantity:
The aspect of land known as soil is fixed in quantity, so
its supply is inelastic. This means that the supply of land is constant but its
price keeps increasing.
Note: Elasticity
will be treated in detail in a later post.
(ii) The economic
value of land surface keeps appreciating but the natural resources in it
depletes as it is being used up.
(iii) Land is a free
gift of nature except for the resources that come from land that is due to
human effort.
(iv) Land is the only
immobile factor of production.
(v) Land is the
primary factor of production that others are built upon. All production begins
with land, as land houses other factors.
(vi) Land is a passive factor of production; it is not productive until acted upon by another factor of production.
(vii) Land as a factor of production has rent as its reward.
(vii) Land as a factor of production has rent as its reward.
Labour
Labour is human effort, whether skilled or unskilled, mental
or physical applied in the process of production. The reward for labour as factor of production
is wages and salaries.
A wage is payment for a piece of work or work per hour, while salary is payment
for work after a certain period, such as monthly, weekly, forthrightly, etc
Characteristics/Features
of Labour
(i) Labour is
variable in quantity:
Labour is variable in supply. This is means that we can vary
the unit of labour applied to production.
(ii) Labour could be
skilled or unskilled, mental or physical. Skilled labour is technical and
specialized labour that requires formal training and skill acquisition;
unskilled labour does not require this.
(iii) Labour is an active
factor of production.
This means that production begins with active involvement of
labour. Land and capital cannot carry out production on their own, until human
effort is applied. So land and capital are passive
factors of production.
(iv) The labourer
sells his labour (services) and not himself
(v) Labour as a
factor of production has wages &
salaries as its reward.
Capital
This refers to man-made resources used in the production of goods/services.
Capital is money and technology, so it is divided into money
capital, physical (tangible) capital and
intangible capital
Money capital is amount of money used to start and run a
business. Physical capital is tangible technological items such as machinery,
equipment, generators, power plants, highways, factory, office building, etc. And
intangible capital is computer software, patent right, etc. The reward for
capital as a factor of production is interest.
Characteristics/Features
of Capital
(i) Capital is variable
in quantity: Capital is a variable factor of production. Its supply changes
with demand.
(ii) Capital is a
creation of man, the application of his technical know-how.
(iii) Capital is
mobile, as it can be moved from place to place.
(iv) Capital is used
to add value
(v) Capital is used
to attain economic growth and economic development.
(iv) Capital suffers
depreciation as a result of usage and obsolescence with a new improved one.
(vi) Capital as a
factor of production has interest as
its reward.
Entrepreneur
An entrepreneur is a person who set up a business; he is the
factor of production that organizes other factors of production.
Characteristics/Features/Functions
of the Entrepreneur
(i) Organizes
other factors of production:
The entrepreneur organizes other three factors of production
– land, labour and capital – and combines them in the right proportion to
achieve efficiency in minimizing production cost yet maintaining output
quality.
(ii) The entrepreneur
initiates the business activity and introduces innovations. It is the
entrepreneur that conceives the business idea and implements it. He also brings
about innovations.
(Note: Innovation means new ways of doing things such as new
technology, new method new product, etc)
(iii) Bears Risk
Business involves risk such as loss of income and assets. Ultimately,
it is the business owner (the entrepreneur) that suffers the losses.
(iv) The entrepreneur
is a decision taker. His decisions include what to produce, how to produce and
for whom to produce. This in turn makes the entrepreneur decide on the nature
of the goods, the technology to use, the kind of labour to employ, the pricing
policy, the business and its product advertisement, etc.
(vi) Entrepreneur as
a factor of production has undistributed profit
as its reward.
Factor Input
Combination: Capital Intensive vs Labour Intensive
If more capital and less labour is employed in a production
process, then we say the production is capital-intensive. But if vice versa,
then it labour-intensive
Cost of Input
Factor and Cost of Production
High cost or increase in the price of a factor of production
would mean increase in production cost, which will translate to increase in
price of goods/service produced.
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