Factors of Production
Factors of production are all the things that are needed to make a commodity. There are usually four types of factors of production- land, labour, capital, and intellectual capital or entrepreneurship. The land is all the free available resources provided by nature. Labour, on the other hand, is the work done by people. Capital the amount invested by the owner in his or her business and intellectual capital means humans, connections, and intelligence. To make a commodity and earn profit a business enterprise has to employ these factors of production.
In this text, the topic of discussion will be factors of production. The two most basic factors of production will be discussed – land and labor. First, let’s ask the question – What does ‘Factors of production’ mean? Let’s answer this.
John wants to build a toy. He wants the toy to be a race car. He cannot make the toy car out of nothing. To make the toy, he will need to collect and join different things. What could these things be? John wants the toy to be made of plastic. So he will need to get plastic. To run the toy car, batteries will be needed. So John will need to get batteries. He will need an antenna for the car and remote to connect. So he will collect antennae. John will also need to buy small tires so that the car can move. As you can see, John will need many things to build the toy car. Plastic, batteries, antennae, tires and many other things will be needed by John to build the car.
Let’s take another example. A boy, Mridul, wants to cook and eat Maggi. To make the Maggi he will need to buy a packet of maggi. He will need a pan and he will need water so that he can cook the maggi. Only when Mridul has all of these things can he cook the Maggi. Without them, Mridul will not be able to cook and eat the Maggi.
Factors of production are all the things that are needed to make something. John needs plastic, batteries, antennae, tires etc. Mridul needs a Maggi packet, a pan, and water. These are the factors of production that they need to make what they want. For John, the factors of production are everything that he needs to make the car. For Mridul, the factors of production are everything that needs to cook the Maggi.
There are usually four types of factors of production:
- Intellectual Capital (Entrepreneurship)
For this article, we will be discussing the two simpler ones – land and labor. Since, capital and intellectual capital are more difficult to understand, they will be covered at a higher level.
Let’s begin with Land first.
When people speak of land, they only mean the surface of the Earth. In economics, land covers many other things as well. Land, in economics, talks about all the natural resources of Earth. They also mean that they are free gifts of nature. They don’t have to be made by anyone. They are there from before and exist only as a gift of nature. The surface of the earth is covered under land but so are other things. Land even talks about what is below the surface of the Earth. Things such as iron, gold, coal etc. are all found under the surface of the earth. Land in economics covers everything from soil, rivers, oceans, forests, mountains, deserts, waters, rain, air, sun, moon etc.
Land is the first and most important resources to make anything. There can be no production without land. In John’s example, let’s say that John wants to start a factory of toy cars. He will need many things to start building his cars. But the most important thing he needs is Land. He will need land to build his factory. He will need land to keep his machines. He will need water for his workers. Without any of this, John will not be able to start his factory. This is why Land is the first thing that is needed to start production.
Now, we shall move on and start discussing labor. Even when land has been bought, nothing can be produced if there is nothing else. Labor is the work done by people. For John to make the toy cars, he will need to hire people. These people will help him make the toy car and sell it to other people. In the same way, Mridul will need to make the Maggi with his own hands for it to be cooked. He cannot just wait for the Maggi to automatically get made.
When we go to McDonald’s to buy a burger, we go to the counter to make the order and pay the money. There is always a cashier behind the counter to take the order. In factories, there are always people who assemble the products. When we go to watch a movie, there are always people who guide us to our seats. In the bank, there are people to help us with our questions.
The cashier in McDonald’s, the workers in factories, the people at the movies and in the bank, are all labor. Without them, goods would not be made, and services would not be provided. Without the cashier, no one would take our order at McDonald’s and we would be left hungry. There are different kinds of labor. All of them do different kinds of work. Different kinds of labor is important or we could not make all this different stuff.
Labor is basically what is needed to ensure the production process gets completed.
These are what two of the factors of production – Land and Labor, basically are. They are very important for making stuff and without them, goods would never be made and services would never be provided.