XVIII. Text в Factors of production

Factors of production are resources that go into the creation of goods and services. Factors of production are as follows: natural resources or land, human resources or labour and capital.

Natural resources are a contribution to productive activity made by land (for example, a factory site or farm location), raw materials such as iron, coal, oil, etc., water for crops and power production. Thus, natural resources are things supplied by nature and not created by human efforts. But applying for example fertilizer to improve the soil, a farmer can « produce* better land and raise its price. The price paid for the use of land is called rent. Rent becomes income to the owner of the land.

Land has following essential characteristics — it is durable, that is, land is not used up in the production process, although it may be depleted by use and it is limited, it cannot be easily increased to meet an increase in demand.

Labour is one of the three leading elements of production. Labour has a variety of functions: production of raw materials, manufacturing of final products, transferring things from one place to another, management of production and services like the ones rendered by doctors and teachers. In other words, human resources are people with all their efforts and abilities.

The price paid for the use of labour is called wages. Wages represent income to workers who own their labour.

Demand for labour is influenced by the demand for goods produced by workers, the proportion of wages in total production costs, etc. The supply of labour depends upon the size of population, skills, education level, etc. If demand for and supply of labour are not in equilibrium, there is unemployment. The third factor of production capital refers to goods and money used to produce more goods and money. Capital is divided into human, financial and physical capital.

Human capital is the quality of labour resources which can be improved through investments, education and training.

Bonds, stocks, available bank balances are included in the financial capital.

Physical capital is subdivided into fixed capital which includes machinery, work plants, equipment, factories, buildings and goods that are designed to increase the productive potential of the economy for future years and working capital which includes the stocks of finished and semi-finished goods that will be economically consumed in the near future or will be made into a finished consumer good in the near future. Both physical capital and financial capital make a great contribution to production. The price paid for the use of capital is called interest.

Some economists mention entrepreneurship, individual capital or just “leadership” as a fourth factor. However, this seems to be a form of labour or human capital. Entrepreneurs think of ideas, organize the other three factors of production and take risks with their own money and the financial capital of others. The success or failure of a business often depends on the quality of entrepreneurship.

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