Question

Explain three factors of production

Answer 1

1. Land - it is a natural factor of production that is used for cultivation or construction.

2. Labour - this includes human resources skilled as well as unskilled required for the production of goods and services. Labour is another important factor of production. It means human exertion.

3. Capital - it is the wealth other than land which is used for the production of wealth.

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Answer 2

Factors of Production: Land, Labor, Capital

What It Means

In economics the term factors of production refers to all the resources required to produce goods and services. A paper company might need, among many other things, trees, water

A variety of historical and economic circumstances converged to bring the factors of production into being in Europe beginning in the sixteenth century. These changes took different forms in different countries, but they combined to pave the way for capitalism. In England peasants were evicted from rural areas so that nobles could use the land to pasture their sheep, whose wool had become a profitable commodity. This resulted in an influx of workers into cities, where they were able to (or were forced to) sell their labor to employers. Thus a market for labor developed. In France an influx of gold from the New World caused the prices of many goods and services to rise, and yet the landowning nobility had no way of increasing their wealth because it was based on collecting fixed amounts of money and farm produce from the tenants who farmed their land. These newly impoverished nobles thus began selling off their land to increasingly wealthy merchants. The result was the emergence of a market for land. In these and other ways land, labor, and capital were freed from their traditional restrictions and made available to anyone who could pay for them. Those who could buy the factors of production could combine them in the pursuit of its profit

More Detailed Information

The availability of the factors of production for use as economic resources was not an inherent feature of the world, then, but the result of specific historical changes. In particular, the freeing of land, labor, and capital from the control of rulers and other authority figures was necessary for these entities to function in a market economy.

The payments that households receive in return for the third factor of production, capital, are called interest payments. Capital markets work according to slightly more complicated processes than do the land and labor markets. In general, businesses must borrow money to make the large investments in the equipment that they need to increase their profitability. Companies often borrow money from banks, but banks are really nothing more than intermediaries. Banks take in money from individuals and households in the form of deposits, then they lend it out to borrowers. The bank pays depositors interest (a fee for the use of their money), and borrowers pay the bank a higher rate of interest. The bank makes a profit on the difference between the two interest rates, but it is ultimately the savings of individuals and households, rather than the bank’s money, that businesses are using to purchase capital. The interest payments that those individuals and households receive are the payments for capital in the factor markets.

The resource or factor markets, together with the markets for products, have a profound effect on all production and distribution decisions. The paper company above, for example, might find that at a certain price, its paper products sell rapidly and ensure it a comfortable rate of profit.

From the point of view of a nation or of the world as a whole, too, the factors of production represent one of the most important variables in the overall economic equation. If we think of a nation’s economic output as a river, the factors of production might be represented as the river’s headwaters. Changes in the cost of land (or natural resources; for example, rising oil prices), labor (rising wages), or capital (rising interest rates) can profoundly affect the economy as a whole.