factors of production
To produce goods and services requires resources. We call these the factor inputs available in the production process.
Economic resources are scarce relative to the infinite needs and wants of people and businesses operating in the economy. It is important to use these resources efficiently in order to maximise the output that can be produced from them.
Economists make a distinction between three types of resources - land, labour and capital.
LAND
Land is the natural resources available for production. Some nations are endowed with natural resources and exploit this by specialising in the extraction and production of these resources - for example - the development of the North Sea Oil and Gas.
Only one major resource is for the most part free - the air we breathe. The rest are scarce, because there are not enough natural resources in the world to satisfy the demands of consumers and producers. Air is classified as a free good since consumption by one person does not reduce the air available for others - a free good does not have an opportunity cost
LABOUR
Labour is the human input into the production process.
In the UK, of about 59 million inhabitants only approximately 35 million are of working age (16-64 years for men and 16-59 for women), and of those about 28 million have paid jobs. The employment level for people in the Uk economy is shown in the chart below. Over recent years there has been a sustained increase (expansion) in the employed labour force - providing more labour resources with which to increase total output (GDP)
Two important points need to be remembered about
labour as a resource:
A housewife, a keen gardener and a DIY enthusiast all produce goods and services, but they do not get paid for them. They are producing non-marketed output and the output of these people is not included in Gross Domestic Product
Not all labour is of the same quality. Some workers are more productive than others because of the education, training and experience they have received
Human capital refers to the quality of labor resources, which can be improved through investments in education, training, and health
ENTREPRENEURS
Entrepreneurs are people who organize other productive resources to make goods and services. Some economists regard entrepreneurs as a specialist form of labour input. Others believe that they deserve recognition as a separate factor of production in their own right.
The success and/or failure of a business often depends critically on the quality of entrepreneurship.
CAPITAL
To an economist, capital has several meanings - including the finance raised to operate a business. But normally the term capital means investment in goods that can produce other goods in the future.
Capital refers to the machines, roads, factories, schools and office blocks which human beings have produced in order to produce other goods and services. A modern industrialized economy possesses a large amount of capital, and it is continually increasing. Increases to the capital stock of a nation are called investment. Investment is important if the economy is to achieve economic growth in the long run.
FIXED CAPITAL:
Fixed capital includes machinery, plant and equipment, new technology, factories and buildings - all goods designed to increase the productive potential of the economy in future years.
We also include the social capital created from Government investment spending, i.e. the building of new schools, universities, hospitals and spending on expanding the national road network. In the summer of 2000, Chancellor Gordon Brown announced large scale increases in government spending on education, health and transport. One reason behind this spending boost was the desire to increase the stock of social capital available to meet the needs of the economy in a changing world.
See also public goods and merit goods
WORKING CAPITAL:
Working capital includes stocks of finished and semi-finished goods (components) that will be either consumed in the near or will be made into finished consumer goods.
"If God had meant there to be more than 2 factors of production, He would have made it easier for us to draw three-dimensional diagrams"
Solow, Robert
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