You may have seen an individual operating a small juice stand. Running such a stand could be one of the simplest examples of the main objective of an economic system; making profit. For profit to be made, one requires particular things; inputs. Anything that is used to produce another thing is known as an input. The inputs a farmer will use to produce maize include soil, seeds, manure, tractor, water and other tools. Without these inputs, there would be no produce.
Input can be put into two categories which are primary and secondary. Primary inputs are those that render services. On the other hand, secondary inputs are inputs gotten from primary inputs and used for production. When a farmer uses soil, tools, tractor and the services, they are primary inputs because they provide services required for production. The manure, water, seeds and pesticides are incorporated in the product for which they are used hence, they are secondary inputs. Primary inputs are production factors.
Factors of production definition
Economic inputs used to earn profits are referred to as factors of production. Traditional economic theory indicates that the four major factors of production include land, labour, capital and entrepreneurship. This article will give the factors of production definition of each of the above elements.
Primary inputs can also be referred to as factor inputs. Secondary inputs are also referred to as non-factor inputs. Production takes place with the assistance of resources which can be grouped into natural wealth, labour and entrepreneur, and manufactured supplies.
Factors of Production explained
Now that you know the production factors, let us briefly explain them. These factors are vital to the economy and humans require all of them for the development of a nation's economy. Different people may own or provide these factors. However, they must work together to be beneficial to the economy. An entrepreneur will combine these factors with the sole purpose of making profit.
The first production factor is land. Land also includes all free natural resources. Land includes what nature has blessed humanity with. These include what is above the ground and what is underground. Nature has gifted humans with soil, forests, rivers, mines, mountains, deserts, air, and rain, among others. This also includes anything natural that is used to produce goods and services, including anything that originates from the land. Some of what we get from land includes copper, oil, water, coal, natural gas and forests. Land resources are mainly raw materials used in the manufacturing process.
Note: These resources can be renewable, e.g water or non-renewable e.g coal.
Another factor of production is labour. It is human efforts that are applied mentally or physically with the goal of receiving payment. Therefore, labour is the effort of an individual uses in the manufacturing process of goods and services. Labour resources include the work done by the server who serves you at a local restaurant and the architect who designed the house you live in or office you work from. Simply put, labour is the effort you get paid for after you do a job.
Note: Labour is among the active factors of production in economics, while land is passive.
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Another factor is capital. Capital includes the machinery, materials and buildings that are used to manufacture goods and services. Capital differs based on the worker and the type of work to be done. Different professions require different tools. Capital also includes any manufactured goods that are used for further the production of wealth. Any man-made aids to manufacture, that are not consumable are referred to as capital. A growth in the capital of an economy implies a rise in the productive capacity of a nation’s economy. Therefore, logically and chronologically, capital comes from land and labour.
Note: Capital is an artificial material source of production.
An entrepreneur is an individual who takes care of and organizes all the other factors and assumes the risks that come with the production of goods and services. Successful entrepreneurs are mostly innovators who find new ways to manufacture goods and services. They also develop new products for consumers. If the entrepreneur does not combine land, labour, and capital in new ways, many of the innovations known to the world would be non-existent.
Entrepreneurs are critical drivers in economic growth. They have assisted in building some of the largest firms in the world. They are also the investors in some of the small ventures around you. Entrepreneurs do well in economies where they are at liberty to start their businesses and purchase resources without restrictions.
Note: An entrepreneur is a person who puts the other factors of production together to make profit.
The factors of production and their rewards
Each of the four factors of production in economics has its prize. Imagine a factors of production chart where, from land, the owner receives rent, a labourer providing labour will get paid wages or salary, capital earns interest and an entrepreneur gets profit.
Scarcity and the factors of production pose a considerable threat to the economy. If these factors are scarce, then the economy will not thrive. If land does not produce sufficient raw materials for production, there would be nothing to work with to create final products. Without raw materials, there would be no need for workers to offer labour. Meaning that landowners would not receive rent, there would be no wages for the labourer, no interest on the capital and no profit for the entrepreneur. The factors are all interdependent on one another in such a manner that one would be non-existent at the expense of the loss of another.
The factors of production massively affect the economy. When there is no land, most of the raw materials required for production will not be there. Nations should invest in these elements to ensure the growth of their economy. The factors of production go hand-in-hand. Without land, there would be no source of raw material required for the production of most goods. Entrepreneurs would not be able to employ anyone. The situation would be catastrophic to the economy of a nation.