1.2 FACTORS OF PRODUCTION
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Factors of Production
Producing goods and services requires resources. These resources are scarce relative to the unlimited wants of economic agents. These resources are known as the factors of production. The factors of production are land, labour, capital and entrepreneurship:
Producing goods and services requires resources. These resources are scarce relative to the unlimited wants of economic agents. These resources are known as the factors of production. The factors of production are land, labour, capital and entrepreneurship:
1. Land refers to the resources that come out of the land such as timber, coal and the physical areas on which a factor/ business sits. All of these are scarce. Air is the one resource that is for the most part free. Land is geographically immobile (it cannot be moved) but it is occupationally mobile meaning that it can have various different uses. Land is usually allocated to the highest bidder.
2. Labour – labour are the workers in the economy. Not all labour is homogenous and capable of carrying out the same job. Labour receives a wage in compensation for the work that it completes. There will be more on labour later. 3. Capital – we can split capital into a variety of subsections. Here are the main two; fixed capital and working capital. Fixed capital is the buildings, tools and machinery used in the production process. This level of capital can be increased by business investment. Working capital includes the stock of finished or unfinished good of firms. These goods will be consumed in the near future or finished and then be ready for sale. 4. Entrepreneurship. This is an individual who combines the 3 previous factors of production together in an innovative and creative way to create a profitable company |
For simplicity and analytical purposes, economists tend to focus on the two main factors of production that are labour and capital. The relationship between these two factors and the level of output is known as the production function.