In economics, factors of production, resources, or inputs are what are used in the production process to produce outputs — that is, goods and services. The quantities used of various inputs determine the quantity of output according to a relationship called the production function. There are four basic resources or factors of production: land, labor, capital, and the entrepreneur (or enterprise). These factors are also often described as “goods or services produced” to distinguish them from the goods or services purchased by consumers, which are often called “consumer goods”.
types of factors of production
There are two types of factors: primary and secondary. The previously mentioned basic factors are land, labor and capital. Materials and energy are secondary factors in classical economics because they are obtained from land, labor, and capital. Primary factors facilitate production but do not become part of the product (as with raw materials) nor are they significantly transformed through the production process (as with fuels used to operate machinery). Land includes not only the production site, but also the natural resources above or below the soil. Modern usage has distinguished between human capital (the stock of knowledge in the workforce) and labour. Entrepreneurship is sometimes considered a factor of production. Sometimes the general state of technology is described as a factor of production. The number and definition of factors varies, depending on the theoretical purpose, empirical focus, or school of economics.
What are the factors of production?
In macroeconomics, the factors of production are as follows.
Physical capital (K): Physical capital or tangible assets that are created for use in the production process. These assets include things like buildings, machinery, computers, and other equipment.
Labor (L): Labor or inputs are the skilled and unskilled activities of human workers.
Land (P): Land that includes natural resources, raw materials, and energy sources such as oil, gas, and coal.
Entrepreneurship (H): Entrepreneurship is the quality of business intelligence that is applied to a production function.
Factors of production in their simplest form include land, labor and capital. Land is a natural resource that is used by an economic enterprise to produce goods and services for profit. Land is not limited to physical possessions or real estate. Land includes any natural resources such as crude oil, coal, water, gold or natural gas. Resources are also natural materials that are used in the production of goods and services.
Labor is also the amount of work that workers do to help in the production process. For example, if a worker works and his effort creates a good or service, he has contributed resources to the labor. For this function to be practical, it must have a specific form. That is, it must be able to explain the process of converting inputs into outputs. This function attempts to calculate the maximum output value for a given input value.
Capital is any tool, building, or machine that is used to produce goods or services. Capital is different in every industry. For example, a programmer uses a computer to write a program, and his capital is the computer he uses. On the other hand, a cook uses pots and pans to cook and provide goods and services, so pots and pans are considered the capital of a cook.
Finally, the businessman combines these factors of production to make a profit. For example, a jewelry entrepreneur combines labor and machinery to produce jewelry and assumes the risks and rewards of producing the goods. Most economic schools have defined the same types of factors of production, including land, labor, capital, and entrepreneurship.
The critical, neoclassical and Keynesian schools of thought agree on who should own the factors of production and their role in economic growth. The Marxist and neo-socialist schools argue that factors of production must be nationalized and that growth comes primarily from capital derived from labour. The Austrian school also states that the factor structure determines business cycles.
The main debate between capitalism and socialism revolves around the ownership of the primary factors of production. The capitalist system believes that private property is a necessary condition for competition, innovation and sustainable economic growth. Socialists argue that the accumulation of private capital will lead to unchecked wealth inequality and the concentration of power in the hands of a few. The Austrian school argues that the Keynesian and neoclassical models are highly incomplete and cannot explain well the process and aims of ownership of the factors of production.
The concept of the production function
The production function is a method of calculating the output of production compared to its input. You can’t make something out of nothing. You need supplies, equipment, resources and some knowledge. How much of these inputs you need can affect your production. As stated in economics, the production function is a method of calculating output as compared to input. In general, the production function depicts the process of physically converting inputs into outputs.
For example, a hypothetical production function can be shown as follows.
Q = f (K, L, P, H)
In this respect, the amount of “output” (Q) is a function of the summed input values for each worker. Of course, not all businesses require the same factors of production or the same number of inputs. Another form of production function reduces inputs to labor and physical capital only. The formula for this form of the production function is as follows.
Q = f(L, K)
In the above relationship, labor force (L) and capital (K) are the two factors of production which have the greatest influence on the quantity of output.
Gross production, final production and intermediate production
In the discussion of production, there are concepts such as total production, intermediate production, and final production, which are essential for a better understanding of the production function as well as the stages of production in all production functions. In the following, these definitions will be reviewed b
What is the total production?
Total Production (Total Production | TP) is the amount of production for each level of production factor.
What is the average production?
Average production (AP) per factor of production is total production divided by that factor of production. For example, average labor output is calculated as follows.
In this relation, Q is the total output and L is the number of labor force.
What is the final product?
Margianl Production (MP) is a concept broadly associated with the production function and gross production. Final output for each factor of production is the first order derivative of the production function with respect to that factor of production. In another definition, final output of a factor of production refers to the last unit produced by that factor of production. In other words, final output is the percentage change in total output divided by the change in the required factor of production.
In the above relationship, dQ is the change in total output and dL is also the change in labour, which is the partial derivative of Q with respect to L. For example, consider a firm called Z. When a factory has no workers, there will be no production, regardless of any amount of physical capital. When a worker is employed, three units are produced per hour worked. When two workers are hired, the total output increases to five units per hour.
Adding the second factor results in two more units per hour worked. In other words, the final output of the second factor was two units. Since final production has a direct relation with the increase of labor force, it is also called final production of labor force. If the increase in output is the result of new technology or physical capital, then this change in output is called the final output of capital. When MP begins to decline, the law of diminishing returns is said to be in effect.