Factors of productions

Economists find it useful to divide resources into four categories which they call land, labour, capital, and entrepreneurship. Collectively these are referred to as factors of production. Land comprises everything commonly called natural resources. It includes the surface of the earth itself and all the other resources provided by nature such as minerals, waterfalls, and trees. The nation's total endowment of land is inherited from the past. This inheritance can be used now and passed on to the future. Some resources are non-renewable. If they are used now, they will not be available in the future. Examples are oil and coal deposits. Other resources are renewable. They can be used today and, under appropriate circumstances, can also be used in the future. Examples are forests and fish.

Modern production techniques often involve recycling waste products which can reduce the depletion of natural resources. For example, paper is manufactured from pulp derived from softwood, so that salvaging wastepaper conserves conifer forests, while recycling glass in the bottle banks which we see around us preserves sand, limestone and salt, as well as energy. (A tone of glass requires half a tone of coal or 1000 kw of electricity.) Notice that renewable resources are living things that will reproduce themselves naturally, while non-renewable resources are inanimate things that, once removed, will not reproduce themselves.

The term " labour" refers to all human resources that could be used in production of goods and services. The basic determi­nant of the amount of the nation's labour is its population. The size of population is itself determined by three factors: birth rates, death rates, and the balance of migration movements into and out of the country. Of course, the whole population is not available for use in production. First, only people of work­ing age - roughly identified as being between 16 and 65 years old — are currently available as a productive resource. Second, many of those who are of working age choose not to work. This latter group includes, for example, those who stay on at school beyond 16, those who choose to retire early, and those who stay at home to look after their families. The total number of persons available for work is referred to collectively as the labour force, or the working population, and the fraction of the total popula­tion who are in the labour force is defined as the activity rate or the participation rate. For example, about one half of women between 16 and 25 are in the UK labour force, so the participa­tion rate of that group is about 0.5.

Capital refers to man-made aids for further production. Fac­tories and equipment are capital. So also are the tools that work­ers use, as well as equipment used by office staff. Capital is a produced factor of production. Its production requires effort: the pay-off to such effort comes because much more can be produced with capital than without it. Capital can take either of two forms, fixed or circulating. Fixed capital provides a stream of services during its lifetime and comprises mainly plant and equipment. All of a country's stock of factories, warehouses, machine tools and equipment are a part of its fixed capital. Circulating, or working, capital circulates through the production process. Stocks of raw materials that a firm is waiting to use, all goods in the process of being produced and all stocks of finished goods waiting to be sold are part of circulating capital. For example, a dress manufactur­ing firm would regard its dress-making machines as fixed capital, while its circulating capital would consist of stocks of partly finished dresses awaiting processing and of stocks of completed dresses waiting to be sold. Notice, therefore, that fixed does not necessarily mean capital that is " bolted to the floor". It means that equipment can be used over and over again in the production of many units of output.

The basic meaning of capital is clear enough, but the concept can be a tricky one, as is shown by the following two examples. First, when resources are used to preserve, or improve, the productivity of land, this is correctly regarded as increasing the quantity of capital rather than that of land. When resources are used in education to improve the productivity of labour, this is also correctly regarded as increasing the amount of the nation's capital. Such capital is so important that a special term, human capital, is used to describe it. This refers to the skills that labour acquires through education and training (both on and off the job) as opposed to abilities that are inherited.

Second, in ordinary speech, people refer to money as capital. A widow with £ 1 million in the bank might refer to that sum as her capital. In economics, however, capital refers to the real as­sets (factories, etc.) and the skills that exist to aid further pro­duction. It does not refer to sums of money, although it is often convenient to value capital assets in money terms.

There is one special kind of human activity that is close to, but different from management. Managers are employees, though usually well-paid ones. Therefore, management is a part of labour as defined above. In a well-established firm where years of experience in producing and selling some standard products have been acquired, managers may have little more to do than supervise routine tasks. When a new venture is being contemplated, however, risks arise. They involve the unknown future. Will a new product appeal to consumers? Can it be ef­fectively marketed? Will its costs of production turn out to be as predicted? And so on.

Someone must assess these risks and make judgements about whether or not to undertake them. The people who do so are called entrepreneurs, and the factor of production is known as entrepreneurship (or, sometimes, as enterprise). Often in the past, and sometimes today, colourful individuals, as Henry Ford and Richard Branson, initiate new products or new ways of pro­ducing old ones. Today, much effort goes into the research and development (R& D) that lies behind new products and new pro­cesses, much of which is called " knowledge-intensive". Many of these increasingly important entrepreneurial functions are car­ried out by the staff of large corporations such as IBM, Sony, and General Electric. Indeed, most firms selling consumers' goods are in constant competition to make new and better products, called product innovation. Most large manufacturing businesses compete to find better and lower-cost methods, called process innovation.

Factors of production: land, labour and capital are combined by entrepreneurs to produce goods and services that satisfy some of unlimited wants.