Monday, 1 July 2013

Factors of Production

An economic term to describe the inputs that are used in the production of goods or services in the attempt to make an economic profit. The factors of production include land, labor, capital and entrepreneurship.

Factors of production refers to inputs required for conducting production. Input is the starting point of every production activity.
According to Prof. Benham, "Anything that contributes towards output is a factor of production."
Mere existence of anything doesn't make it a factor of production but its contribution in production process is a necessary condition. Dr. Alfred Marshall described factors of production as "Agents of Production". Cooperation among factors is essential to produce anything because production is not a job of single factor.
Factors of Production

Classification of Factors of Production

Definition
A factor of production may be defined as "that good or service which is required for production." A factor of production is indispensable for production because without it no production is possible. It is customary to attribute the process of production to four factors, land, labour, capital and organisation.

Land

Land not only consists of mere surface of land but also includes all the natural sources such as oceans, mountains, forests etc. Marshall defines land as " By land is meant materials and forces which nature gives freely for man's aid, in land, water, in air, light and heat." Thus land is a significant part of production which facilitates in the production of goods and services in one way or the other.

Labour

Labour refers to the act of working for some monetary benefits against physical and mental activity. It does not comprise of any leisure activity. It includes the services of a factory worker, any professional workers such as engineers, doctors, teachers, lawyer etc. If a person paints or sings in order to please someone or himself without any target or for monetary benefits he won't be called a labour. But if he intends to sell the painting or sing against any monetary reward then it involves labour. Thus labour forms an essential aspect of production.

Capital

Capital means all human-made materials such as tools, equipments, infrastructure, machinery, seeds, plants, modes of transportation such as rail, road and air etc. In general it encompasses all affluences eliminating land as land is utilised for supplementary production of affluence. Now-a-days, capital not only includes physical capital but also involves human capital which is defined as "process of increasing knowledge, the skills and capacities of all people of the country." Human capital is more vital than the physical capital since without human's interference the materialistic capital cannot be utilised effectively. Prof. Galbraith defines as "We now get the larger part of our industrial growth not from more capital investment but from investment in men and improvements brought about by improved men."

Organisation

The prime aspects of production such as land, labour and capital are correspondingly nature, man and material modes of production. Without these factors it is unfeasible to produce and making use of these factors effectively there has to some source. This source is nothing but the organisation which hires them from their owners by paying rent, salary and interest and makes a decision upon the amount of each required for production. Organisation refers to the services of an entrepreneur who controls, organises and manages the policy of a firm, innovates and undertakes all risks.

Criticisms
  • Several economists have criticisms for the above factors of production economist Benham has objected to a broader meaning of land as a factor of production. As per him, it is convenient to consider only land as factor of production, rather than such elements as sunshine, climate etc. which does not enter directly into costs. Likewise, it is incorrect to group together the services of an untalented worker with that of professionals. Yet again, there is tiny tip in syndicating mutually as capital, as assorted as canals, diesel, seeds and machinery. It would consequently, be more appropriate to chunk collectively all standardized units, whether hectares of land, workers or capital goods and to regard each group as an individual factor of production. This method gives us a hefty integer of factors of production and each group is regarded as a separate factor.

  • Over and again, the distinction amidst land, labour and capital are not apparent. To take land and capital, it is said that land is a gift of nature whose supply cannot be amplified while capital is human made whose supply is amendable. This is not correct for the reason that the supply of land can also be greater than before by cleaning it, draining and irrigating it and fertilising it by the pains of human and capital. The supply of land does not consign to its area alone, but to its productivity.

  • We might regard each unit of a factor as discrete from other units of that factor, but one factor can be substituted for some other factor. For instance, land can be used intensively by employing more labour or more capital in the form of fertilisers, better seeds and superior techniques. By doing so, we substitute labour or capital for land. Likewise labour can be substituted for capital and capital for labour in a factor. In the former case, labour intensive techniques are used. The level of swap of one factor for another will, nevertheless depend on the most competent scheme of production to be used relatively to the cost of the factor to be substituted.

  • Moreover, we find that land, labour and capital frequently get mingled into one another and it is tricky to specify the involvement of each individually. For example, when land is vacant canals are dug and fences are erected, the efficiency of land enhances. But all these development on land are feasible by making capital investments and through labour. In such a condition, it is feasible to stipulate the involvement of land, labour and capital escalating efficiency. Likewise, the sum of money spent on cultivating and exercising workers is integrated under capital. So when such workers produce articles by functioning machines in a factory, they put in their labour as well as ability by using raw materials which are also the product of labour and machines used on land. Thus it is hard to unravel the contribution of land, labour and capital in such cases.

  • The complexity begins as to whether the contribution of land, labour and capital should be taken as such, or of their services. If the community is to plan for the prospect or find out the production possibilities open to it, then the contribution of the factors of production should be measured. Keeping the outlook in view, land may be put to more fruitful uses, labour may be trained for diverse occupations requiring higher skills and capital may be used for producing more roundabout means of production and machinery. Thus "the central economic problem for any community is how to make the best use of its labour and other resources and for this purpose the community must consider the various alternatives. It must consider what the men and the land and the capital might contribute towards output if they were used in different ways and not merely what in fact they are contributing now."

  • Finally, it is habitual not to treat organisation as discrete from labour. This is ambiguous and misjudges the role of the entrepreneur as a factor of production. As a substance of statement, labour and entrepreneur are quite dissimilar from each other. An entrepreneur is a man of special managerial aptitude who controls, organises and manages the entire business of a firm. It is he who utilizes all types of workers and puts them at the places where they are the most appropriate by quality of their education and training.
Significance
  • The concept of the factor of production is of great significance in modern economic study. It is used in the theory of production in which the a range of combinations of factors of production help in generating output when a firm functions under rising or declining costs in the short-run and when the proceeds to scale boosts or shrinks in the long run. Moreover, we can also know how the least cost combination of factors can be attained by a firm.

  • The theory of cost of production also depends upon the combination of factors engaged 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 are variable factors.

  • Fixed factors are those whose costs do not vary with the variation in output, such as machinery, tube well etc. Variable factors are those whose quantities and costs vary with the variation in output. Larger outputs entail 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 persist to produce even if it fails to cover the costs of production of the hired factors and sustains loss. But this is only feasible 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 amidst fixed and variable factors is of much value for the theory of the firm.

  • Finally the concept of factor of production is used in elucidating the theory of factor-pricing. For this idea, 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 earnings to the various resource owners.


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