Introduction to Factors of Production (FOP)
Factors of production (FOP) is an economic terms. FOP are basically all the inputs which are required to produce other goods and services for economic profit. Factors of Production are also known as ‘Inputs’ and ‘Agents of Production’. There are four universally recognized factors of production:
Land refers to all the natural resources which are naturally available i.e. free gifts of nature. It includes all the available natural resources available to man kind above and under the surface. Land includes soil, river, water, forests, mountains, deserts, seas, oceans, sunlight etc.
Characteristics of Land
- Land factor are free gift of nature.
Land factors are natural resources and are present as a free gift to man-kind. The major cost that relates to this resources is a transfer value(cost).
- There is a limited supply of land factor.
The supply of land is limited in the economy. We cannot increase the supply of land in any economy. The land mass will never increase, it will only transfer its form. The ownership of land factor by any individual may increase or decrease as per the demand and supply. We cannot increase the supply of land with increase in demand of it.
- Land is immobile factor of production.
Land is not transferable in its physical form. We cannot move the land body from one place to another place. There is transfer of ownership of such factor of production.
- Land is a passive factor of production
Land doesn’t provide anything on its own to the owner. It is productive only when we use it. In economic terms, the application of land is possible only when labor and capital factors act on it. It will not yield on its own. It remains passive when done nothing.
Labor is a human Factor. It is the effort of human being by head or hand in order to perform any economic activity. It includes both physical and mental effort made by human beings. Labor is one of the most important factor of production because it mobilizes both land and capital.
It is active factor of production. Labor can work on its own and start the production of goods and services Labor’s contribution determines the output in an economy.
Characteristics of Labor
- Labor is an active factor of production.
It is an active factor of production. It is the only factor that can make use of land and capital factor of production.
- Labor is perishable in nature.
Labor has a capacity or limit. We cannot store labor i.e. we cannot store labor of one day and use another day. If labor is not use today, labor is lost permanent. Such instant nature of labor makes it highly perishable.
- Mobile factor of production
Labor shows movement hence it is a mobile factor of production. Laborer transfer its labor from one place to another place, from one location to another location. This is comparatively easier but there are various factors which acts as barrier for the mobility.
- Supply of labor is relatively inelastic.
Supply of labor is inelastic at a certain given point of time. We cannot increase the supply of labor with sudden increase in its demand. The supply and demand of labor is different for different level of skills. At every level of skill, supply is relatively inelastic.
- Inseparable Factor, “Labor” vs. “Laborer”
Labor and Laborer are inseparable factors. We cannot consider labor or laborer independently. Labor cannot exist alone. For Instance: Teacher teaches, actor acts, doctor examines etc.
Capital is another factor of production. It includes all the human made resources involved in the production process. Capital is a passive factor as it cannot produce anything on its own, it requires labor for action. We can increase or decrease the supply of capital factor. There are different types of capital:
- Physical Capital/Real Capital/ Fixed Capital
- Working Capital/ Circulating Capital
- Economic General Working Capital
- Social Public Working Capital
- Human Capital
- Natural Capital
- Social Capital
Characteristics of Capital
- Capital is a human-made factor.
Capital is a human-made factor. It is every other physical factor other than land and labor. All the investment made in the business, machinery, and tools is human-made.
- Capital is a passive factor.
Capital cannot act alone. It requires land and labor to produce something. Business cannot operate only with capital and requires labor for execution.
- Capital is a mobile factor.
Capital has a high mobility among factors of production. It can be moved from one place to another place as per the need by entrepreneur or labor. Capital can be transferred from one site to another, one country to another. It has a quality, divisibility and portability.
- Supply of capital is elastic.
One can increase or decrease the demand and supply of capital when needed. Capital is a human-made resource and is a mobile factor of production, supply is very elastic.
- Capital depreciates and destructible.
The value of capital depreciates with time. All the capital resources have an efficiency parameter, the more we use the more it wears. Inflation is the depreciation in money, low efficiency is depreciation in machinery and weakness, pain is depreciation in labor. It depreciates to become useless
Entrepreneurs are those individual who combine all other factor of production i.e. land, labor and capital. They utilize all these factors of production for profit motive. Entrepreneurial activities are engine of the production environment. This factor organizes land, capital and labor to produce goods and services to earn profit. Entrepreneurs are the boss of all factor of production.
Characteristics of Entrepreneurship
- Entrepreneurship is an organized structure.
Entrepreneurship is a organized structure i.e. it has defined purpose and a structured system, unlike other factors. This factor of production is more action-oriented and active.
- It is an active factor of production.
Entrepreneurship is a human factor and it is an active factor. It manages all factors of production therefore, it needs to regularly work to keep up with production.
- Risk bearing factor.
A market involves a lot of risk and uncertainties. Entrepreneurs are risk bearers and they have the ability to manage the risk. They are unique in this respect. They have the conciseness and ability to predict, analyze and define the risk and provide the solution.
- Entrepreneurship is a profit motive factor.
Another important factor is entrepreneurs work for generating profit. Production is intended for fulfilling the demand and supply in the economy. All the factors work together in fulfilling the needs of consumers and customers. The end result of all this management and process is the generation of profit.