(d) What
are
factors of production?
Answers
Answer:
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, labor, capital, and entrepreneurship.
Explanation:
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Answer: Factors of production are the inputs needed for the creation of a good or service. The factors of production include land, labor, entrepreneurship, and capital.
The modern definition of factors of production is primarily derived from a neoclassical view of economics. It amalgamates past approaches to economic theory, such as the concept of labor as a factor of production from socialism, into a single definition.
Land, labor, and capital as factors of production were originally identified by the early political economists such as Adam Smith, David Ricardo, and Karl Marx. Today, capital and labor remain the two primary inputs for the productive processes and the generation of profits by a business. Production, such as in manufacturing, can be tracked by certain indexes, including the ISM Manufacturing Index.
Land as a Factor
Land has a broad definition as a factor of production and can take on various forms, from agricultural land to commercial real estate to the resources available from a particular piece of land. Natural resources, such as oil and gold, can be extracted and refined for human consumption from the land. Cultivation of crops on land by farmers increases its value and utility. For a group of early French economists called the physiocrats who pre-dated the classical political economists, the land was responsible for generating economic value.
While the land is an essential component of most ventures, its importance can diminish or increase based on industry. For example, a technology company can easily begin operations with zero investment in land. On the other hand, the land is the most significant investment for a real estate venture.
Labor as a Factor
Labor refers to the effort expended by an individual to bring a product or service to the market. Again, it can take on various forms. For example, the construction worker at a hotel site is part of labor as is the waiter who serves guests or the receptionist who enrolls them into the hotel.
Within the software industry, labor refers to the work done by project managers and developers in building the final product. Even an artist involved in making art, whether it is a painting or a symphony, is considered labor.
For the early political economists, labor was the primary driver of economic value. Production workers are paid for their time and effort in wages that depend on their skill and training. Labor by an uneducated and untrained worker is typically paid at low prices. Skilled and trained workers are referred to as human capital and are paid higher wages because they bring more than their physical capacity to the task. For example, an accountant’s job requires synthesis and analysis of financial data for a company. Countries that are rich in human capital experience increased productivity and efficiency.
The difference in skill levels and terminology also helps companies and entrepreneurs arbitrage corresponding disparities in pay scales. This can result in a transformation of factors of production for entire industries. An example of this is the change in production processes in the Information Technology (IT) industry after jobs were outsourced to countries with a trained workforce and significantly lower salaries.
Capital as a Factor
In economics, capital typically refers to money. But money is not a factor of production because it is not directly involved in producing a good or service. Instead, it facilitates the processes used in production by enabling entrepreneurs and company owners to purchase capital goods or land or pay wages. For modern mainstream (neoclassical) economists, capital is the primary driver of value.
As a factor of production, capital refers to the purchase of goods made with money in production. For example, a tractor purchased for farming is capital. Along the same lines, desks and chairs used in an office are also capital.
It is important to distinguish personal and private capital in factors of production. A personal vehicle used to transport family is not considered a capital good. But a commercial vehicle that is expressly used for official purposes is considered a capital good. During an economic contraction or when they suffer losses, companies cut back on capital expenditure to ensure profits. During periods of economic expansion, however, they invest in new machinery and equipment to bring new products to market.
An illustration of the above is the difference in markets for robots in China versus the United States after the financial crisis. China experienced a multiyear growth cycle after the crisis and its manufacturers invested in robots to improve productivity at their facilities and meet growing market demands. As a result, the country became the biggest market for robots. Manufacturers within the United States, which had been in the throes of an economic recession after the financial crisis, cut back on their investments related to production due to tepid demand