What are the Factors of Production? - YouTube

What are the Factors of Production?

Production of anything requires inputs to produce an output, and the inputs used in

the production are known as factors of production. Alternatively, these are resources used in

the production of goods and services. 

Factors are a class of productive elements, which individually are known as units. 

Units are interchangeable and homogenous, moreover, they are perfect substitutes for

each other. Factors, which constitute a group of units, are not a perfect substitute for

each other. Modern economists prefer using ‘inputs’ instead of conventional factors

of production: land, labour, capital and entrepreneurship. 

Classification of Factors of production

Land

Land includes all the natural resources available such as water and air. In the absence of land,

water and sun, a farmer cannot produce crops. 

Every commodity traded in the world can be traced back to land directly or indirectly.

Such as gold is extracted from mines, crude oil is explored and extracted from oil fields,

grains are produced in agricultural land.

Land can be further classified as renewable and non-renewable. Renewable resources can

be used again in the production like an agricultural land used year after year for the cultivation

of food, grains etc. 

Non-renewable land is not usable again and is exhausted as the consumption increases.

A gold mine may not yield additional income for a business when ore reserves are exhausted.

Land is fixed in supply. It is not dependent on the price, therefore supply of land is

perfectly inelastic. 

Labour

Labour includes not only physical but also mental abilities that are done by humans for

a monetary benefit. The contribution of labour depends on the size and quality of labour. 

Higher productivity of labour will likely deliver favourable benefits. Labour cannot

be exchanged for value, unlike land and capital. Labour is used with land and capital and cannot

be separated.

Labour is available in return of wages. While one cannot store labour for future use, the

supply of labour is dependent on the need for production. Labour supply is elastic.

Division of labour emphasises on the speciality of labour in a particular work. Every labour

group in an organisation is further classified into various divisions, depending on the quality,

skills, knowledge and demand. 

Capital 

Capital is a critical factor of production and largely means wealth, which includes stock

of raw material, machinery, tools, building etc. It is also the money available for productive

and investment purposes. 

Securities such as shares and bonds are not classified because they are not used in production,

thus not the factor of production. 

It is largely classified into fixed capital and working capital. Fixed capital is used

in the production continuously and incur wear and tear. The cost incurred in working capital

is recovered when the product is sold. 

Human capital is also a vital unit of production and means the education, skills, and health

of people. It is essential for the improvement in productivity.  

Entrepreneurship

Entrepreneurship is vital to confluence the factors of production and manages risk & uncertainty

associated with the production.

Entrepreneurship is more concerned with business affairs and an entrepreneur takes the risk

and uncertainty associated with production. 

An entrepreneur is responsible for initiating a business enterprise and is engaged in assembling

the factors of production, including land, labour, capital and entrepreneurship. Innovation

and development are also associated with entrepreneurship. 

Entrepreneurs undertake crucial decision of capital allocation, which may include setting

up new factors, purchasing machinery, upgrading skills of human capital, innovating units

of production etc.