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Factors of Production

Geoff Riley

13th April 2014

Our ecological footprint affects the sustainability of economies and has huge implications for future living standards. Environmental pressure groups such as Friends of the Earth and Greenpeace seek to highlight the permanent damage to the stock of natural resources and the dangers from rapid development and the effects of global warming.

The Worldwide Fund for Nature has claimed that the natural world is being degraded "at a rate unprecedented in human history" and has warned that if demand continues at the current rate, two planets will be needed to meet global demand by 2050. Resources are being consumed faster than the planet can replace them

One issue is the threat posed by the shortage of water as the world’s demand for household and commercial use continues to grow each year. Experts predict that half the world's population will be affected by water shortages in just 20 years' time. During the 20th century the world population increased fourfold, but the amount of freshwater that it used increased nine times over. Already 2.8 billion people live in areas of high water stress. For more on this issue visit the World Health Organisation’s special web site on water scarcity.

At the heart of improving resource sustainability is the idea of de-coupling – trying to increase the efficiency with which resources are used and breaking the link between increasing demands and damaging resource depletion.

Factors of Production

Land:

  • Land includes all natural physical resources – e.g. fertile farm land, the benefits from a temperate climate or the harnessing of wind powerand 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.

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

Renewable and Finite Resources

Renewable resources are commodities such as solar energy, oxygen, biomass, fish stocks or forestry that is inexhaustible or replaceable over time providing that the rate of extraction of the resource is less than the natural rate at which the resource renews itself. (This is important!)

This is a key issue in environmental economics, for example the over-extraction of fish stocks, and the global risks of permanent water shortages resulting

Finite resources cannot be renewed. For example with plastics, crude oil, coal, natural gas and other items produced from fossil fuels, no mechanisms exist at present to replenish them

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Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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