You are on page 1of 8

Four Factors of Production

Economic resources are the goods or services available to individuals and


businesses used to produce valuable consumer products. The classic economic
resources include land, labor and capital. Entrepreneurship is also considered an
economic resource because individuals are responsible for creating businesses and
moving economic resources in the business environment. These economic resources
are also called the factors of production. The factors of production describe the
function that each resource performs in the business environment.

Land
o Land is the economic resource encompassing natural resources found
within a nation’s economy. This resource includes timber, land,
fisheries, farms and other similar natural resources. Land is usually a
limited resource for many economies. Although some natural
resources, such as timber, food and animals, are renewable, the
physical land is usually a fixed resource. Nations must carefully use
their land resource by creating a mix of natural and industrial uses.
Using land for industrial purposes allows nations to improve the
production processes for turning natural resources into consumer
goods.
Labor
o Labor represents the human capital available to transform raw or
national resources into consumer goods. Human capital includes all
able-bodied individuals capable of working in the nation’s
economy and providing various services to other individuals or
businesses. This factor of production is a flexible resource as workers
can be allocated to different areas of the economy for producing
consumer goods or services. Human capital can also be improved
through training or educating workers to complete technical functions
or business tasks when working with other economic resources.
Capital
o Capital has two economic definitions as a factor of production. Capital
can represent the monetary resources companies use to purchase
natural resources, land and other capital goods. Monetary resources
flow through a nation’s economy as individuals buy and sell
resources to individuals and businesses. Capital also represents the
major physical assets individuals and companies use when producing
goods or services. These assets include buildings, production facilities,
equipment, vehicles and other similar items. Individuals may create
their own capital production resources, purchase them from another
individual or business or lease them for a specific amount of time from
individuals or other businesses.
Entrepreneurship
o Entrepreneurship is considered a factor of production because
economic resources can exist in an economy and not be transformed
into consumer goods. Entrepreneurs usually have an idea for creating a

valuable good or service and assume the risk involved with


transforming economic resources into consumer products.
Entrepreneurship is also considered a factor of production since
someone must complete the managerial functions of gathering,
allocating and distributing economic resources or consumer products
to individuals and other businesses in the economy.

Identifying Factors of Production


You may have at some point in your life been part of or seen local neighborhood children running a
lemonade stand. Running a lemonade stand is probably the simplest example that showcases one of
the main goals of our economic system: to make a profit. In order to make a profit, a person usually
needs certain things, or certain economic inputs. The economic inputs used to make a profit are
called factors of production. According to traditional economic theory, there are four main factors of
production: land, labor, capital, and entrepreneurship.

Land
In its simplest form, land is the physical place where economic activity takes place. In our lemonade
stand example, it could be the patch of lawn in front of your house. However, land also includes all
the natural resources found on it.
Resources can include timber, water, oil, livestock, and so forth. So if you used real lemons from a
tree in your yard to make that lemonade, you used part of the land. Land plays an important part in
production because land itself and the resources on it are usually limited. Political regulations
prevent a person from just going and claiming something for themselves, or there may not be
enough for everyone to have. Also, many of the natural resources are nonrenewable, meaning that
their amount is fixed, and they can't be used indefinitely. Thus, producers must carefully manage
land and its resources.

Labor
It seems obvious, but things can't be produced unless someone makes them. Your lemonade won't
make itself, and it won't sell itself if you aren't there to do it. Therefore, another important factor of
production is labor. Labor represents all of the people that are available to transform resources into
goods or services that can be purchased. This factor is somewhat flexible since different people can
be allocated to produce different things. Nobody has to produce everything themselves. That would

be impractical. It's also important that a labor force is well educated and well trained to ensure that
they can produce goods at peak efficiency and quality.

Capital
Perhaps to get your lemonade stand up and running, you also needed money to make signs to
advertise your delicious drink. You may also have used a small table to set up your pitcher and cups.
Both of these things - money and equipment - are considered capital. More specifically, capital can
be the money that companies use to buy resources, as well as the physical assets companies use
when producing goods or services, such as factories and machinery.
Capital is an important factor of production because it's what allows labor and land to be purchased.
Steady streams of capital are often required in order to keep a business going.

Land:

Land includes all natural physical resources e.g. fertile farm land, the
benefits from a temperate climate or the harnessing of wind power and solar
power and other forms of renewable energy.

Some nations are richly endowed with natural resources and then specialise in
the their extraction and production for example the high productivity of the
vast expanse of farm land in the United States and the oil sands in Alberta,
Canada. Other countries such as Japan are heavily reliant on importing these
resources.

Labour:

Labour is the human input into production e.g. the supply of workers available
and their productivity

An increase in the size and the quality of the labour force is vital if a country
wants to achieve growth. In recent years the issue of the migration of
labour has become important. Can migrant workers help to solve labour
shortages? What are the long-term effects on the countries who suffer a drain or
loss of workers through migration?

Capital:

Capital goods are used to produce other consumer goods and services in the
future

Fixed capital includes machinery, equipment, new technology, factories and


other buildings

Working capital means stocks of finished and semi-finished goods (or


components) that will be either consumed in the near future or will be made into
consumer goods

New items of capital machinery, buildings or technology are used to boost


the productivity of labour. For example, improved technology in farming has
vastly increased productivity and allowed millions of people to move from working
on the land into more valuable jobs in other industries.

Infrastructure a crucial type of capital


Examples of infrastructure include road & rail networks; airports & docks;
telecommunications e.g. cables and satellites to enable web access.
The World Bank regards infrastructure as an essential pillar for economic growth in
developing countries. India is often cited as a country whose growth prospects are
being limited by weaknesses in national infrastructure.

Examples of UK infrastructure investment include:

2nd Forth Road Bridge

Argyll wind farm array

Cross Rail

High Speed Rail project

London Gateway Port

Londons new super sewer

Nuclear power plants e.g. the one at Hinkley Point

Entrepreneurship

Regarded by some as a specialised form of labour input

An entrepreneur is an individual who supplies products to a market to make a


profit

Entrepreneurs will usually invest their own financial capital in a business and
take on the risks. Their main reward is the profit made from running the business

Microeconomic Goals
Efficiency and equity are the two microeconomic goals most relevant to markets, industries,
and parts of the economy, and are thus important to the study of microeconomics.

Efficiency: Efficiency is achieved when society is able to get the greatest amount
of satisfaction from available resources. With efficiency, society cannot change the
way resources are used in any way that would increase the total amount of
satisfaction obtained by society. The pervasive scarcity problem is best addressed
when limited resources are used to satisfy as many wants and needs as possible.
While efficiency is indicated by equality between demand price and supply price for a
given market, there are no clear-cut comprehensive indicators for attaining this
efficiency goal. While it is possible, in theory, to pinpoint what is needed for
efficiency, the complexity of the economy makes the task difficult to accomplish in
practice.

Equity: Equity is achieved when income and wealth are fairly distributed within a
society. Almost everyone wants a fair distribution. However, what constitutes a fair
and equitable distribution is debatable. Some might contend that equity is achieved
when everyone has the same income and wealth. Others contend that equity results
when people receive income and wealth based on the value of their production. Still
others argue that equity is achieved when each has only the income and wealth that
they need.
Equity means income and wealth are distributed according to a standard of fairness.
But what is the fairness standard? It could be equality. Or it could be the productive
value of resources. Or it could be need. Standards for equity moves into the realm
of normative economics.

Macroeconomic Goals
Full employment, stability, and economic growth are the three macroeconomic goals most
relevant to the aggregate economy and consequently are of prime importance to the study
of macroeconomics.

Full Employment: Full employment is achieved when all available resources


(labor, capital, land, and entrepreneurship) are used to produce goods and services.
This goal is commonly indicated by the employment of labor resources (measured by
the unemployment rate). However, all resources in the economy--labor, capital, land,
and entrepreneurship--are important to this goal. The economy benefits from full
employment because resources produce the goods that satisfy the wants and needs
that lessen the scarcity problem. If the resources are not employed, then they are
not producing and satisfaction is not achieved.

Stability: Stability is achieved by avoiding or limiting fluctuations in production,


employment, and prices. Stability seeks to avoid the recessionary declines and
inflationary expansions of business cycles. This goal is indicated by month-to-month
and year-to-year changes in various economic measures, such as the inflation rate,
the unemployment rate, and the growth rate of production. If these remain
unchanged, then stability is at hand. Maintaining stability is beneficial because it
means uncertainty and disruptions in the economy are avoided. It means consumers
and businesses can safely pursue long-term consumption and production plans.
Policy makers are usually most concerned with price stability and the inflation rate.

Economic Growth: Economic growth is achieved by increasing the economy's ability


to produce goods and services. This goal is best indicated by measuring the growth
rate of production. If the economy produces more goods this year than last, then it is
growing. Economic growth is also indicated by increases in the quantities of the
resources--labor, capital, land, and entrepreneurship--used to produce goods. With
economic growth, society gets more goods that can be used to satisfy more wants
and needs--people are better off; living standards rise; and scarcity is less of a
problem.

There is no nation without objectives. Any economy should have goals to show society. These are "my
chosen goals", but as you get familiar with your studies, you will discover many many more.
1. Economic Efficiency Getting the maximum output or a good from the resources used in production.
2. Equity of Fairness Good distribution of welfare.
3. Economic Growth Increase in output (real GDP) an expansion of production possibilities.
4. Economic Stability - Pursuing economic stability: avoiding economic and financial crisis, inflation and is
a national concern.
5. Employment Growth Positive change in the level or production of goods and services by a country
over a certain period of time.

The Small Picture


Microeconomics studies the small picture -- the behavior of individuals and
companies and the market for each type of product. For example,
microeconomists study the influence of supply and demand on the price of
shoes. Although "micro" is a prefix meaning "small," the worldwide market for a
particular product, such as wheat, is also of interest to microeconomists.
Microeconomics is based on the assumptions of Adam Smith, an 18th-century
philosopher who is widely considered to be the father of economics, wherein
market conditions -- supply, demand, production and selling -- are in equilibrium,
and, if perturbed, quickly return to equilibrium. Everyday concerns, such as price
supports, taxes and minimum wages, are part of microeconomics, according to
G. Chris Rodrigo of the International Monetary Fund.

The Big Picture


Macroeconomics studies the function of the economy of a nation as a whole. Its
domain includes how government policies and the markets for various products
affect inflation, employment and economic growth. However, the macro side
also extends beyond national borders because international trade and
investment impact the economies of many nations. Important areas of study in
macroeconomics include short- and long-term trends. Macroeconomics
originated with John Maynard Keynes in his attempts to explain the "market
failure" that characterized the Great Depression, according to Rodrigo.

Macroeconomics is the economics of production levels, the gross national product of a


country or the unemployment rate of a city or nation.
Microeconomics is more specific. It deals with consumers and consumer spending,
specific business firms, prices of products and the effect of those prices on the market.

Microeconomics is the study of particular markets, and segments of the economy. It


looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.

Macro economics is the study of the whole economy. It looks at aggregate variables,
such as aggregate demand, national output and inflation.

Micro economics is concerned with:

Supply and demand in individual markets

Individual consumer behaviour. e.g. Consumer choice theory

Individual labour markets e.g. demand for labour, wage determination

Externalities arising from production and consumption. e.g. Externalities

Macro economics is concerned with

Monetary / fiscal policy. e.g. what effect does interest rates have on the whole economy?

Reasons for inflation, and unemployment

Economic growth

International trade and globalisation

Reasons for differences in living standards and economic growth between countries.

Government borrowing