PRODUCTION FACTORS: CLASSIFICATION AND BEHAVIOR - JOB - 2025

The factors of production, in the field of economics, describe the inputs or resources that are used in the production of goods or services in order to obtain an economic benefit. Factors of production include land, labor, capital, and, more recently, entrepreneurship.

These factors of production are also known as management, machines, materials and labor, and lately there has been talk of knowledge as a possible new factor of production. The quantities used of the various factors of production determine the quantity of output, according to the relation called the production function.

The factors of production are the necessary inputs for supply; they produce all the goods and services in an economy. That is measured by gross domestic product. They are usually classified as producer goods or services, to differentiate them from the services or goods that consumers buy, which are often called consumer goods.

It requires the combination of these four factors at the same time to be able to produce a product. As the famous Greek philosopher Parmenides said: "Nothing comes from nothing." For there to be growth, it cannot be legislated or desired, it needs to be produced.

The factors of production are the resources that allow creating products and providing services. You cannot create a product from nothing, nor can you perform a service without working, which is also a factor of production. A modern economy cannot exist without the factors of production, which makes them quite important.

Classification

The resources necessary for the generation of goods or services are generally classified into four large groups: land, labor, capital, entrepreneurship.

land

It refers to all natural resources; These resources are gifts given by nature. Some examples of natural resources are water, oil, copper, natural gas, coal, and forests. It includes the production site and everything that comes from the ground.

It can be a non-renewable resource, such as gold, natural gas, and oil. It can also be a renewable resource, like wood from forests. Once man transforms it from its original condition, it becomes a capital good.

For example, oil is a natural resource, but gasoline is a product. Farmland is a natural resource, but a commercial center is a capital asset.

Job

It includes all the work that workers and employees carry out at all levels of an organization, except the employer. As a factor of production, it implies any human contribution.

The quality of work depends on the skills, education and motivation of the workers. It also depends on productivity. This measures how much is produced each hour of work time in production.

Generally speaking, the higher the quality of work, the more productive the workforce. You also benefit from productivity increases due to technological innovations.

Capital

Capital is the abbreviation for capital goods. They are human-made objects, such as machinery, tools, equipment and chemicals, which are used in production to produce a good or service. That is what differentiates it from consumer goods.

For example, capital goods include industrial and commercial buildings, but not private dwellings. A commercial jet is a capital good, but a private jet is not.

Some common examples of equity include hammers, forklifts, conveyors, computers, and delivery vans. An increase in capital goods means an increase in the productive capacity of the economy.

Entrepreneurship

Entrepreneurship or entrepreneurship is the impulse that is given to develop an idea in a business. An entrepreneur combines the other three factors of production to generate production.

Most of the classical economic models ignore entrepreneurship as a factor of production, or consider it a subset of work.

So why do some economists consider entrepreneurship as a factor of production? Because it can increase the productive efficiency of a company.

The entrepreneur is the individual who identifies new opportunities, takes an idea and tries to obtain an economic benefit from it by combining all other factors of production.

The entrepreneur also assumes all the risks and rewards of the business; the most successful are those who take innovative risks. Entrepreneurs are a vital engine of economic growth.

Behavior of factors of production

Many times, a product or service uses each of the four factors of production in generating its manufacture.

There are two types of factors: primary and secondary. The primary factors are land, labor (the ability to work), and capital goods.

Materials and energy are considered secondary factors in classical economics because they are obtained from land, labor, and capital.

Primary factors make production possible, but they do not become part of the product (as occurs with raw materials), nor are they significantly transformed in the production process (as occurs with gasoline that is used to fuel the machinery).

Prices of factors of production

In a free market, factor prices are determined by the demand and supply of each factor of production. The cost of production is simply the sum of the costs of all the factors of production used in production.

The income obtained by the owners of the factor of production land and other natural resources is called rent. The reward or income of labor resources obtained by the factor of production labor is called salary. It is the largest source of income for most people.

Income earned by owners of capital assets is called interest. The payment to entrepreneurship of entrepreneurs is called profit or profit, as a reward for the risk they assume.

Short-term production versus long-term production

In business theory, the distinction between short and long term is not necessarily based on duration; it is based rather on the degree of variability of the factors of production.

In the short term at least one of the factors of production remains unchanged, it remains fixed. In contrast, in the long run all factors of production are variable.

In a short-term two-factor production process, only one factor of production is variable. In a two-factor production model in the short run, changes in output (physical product) are the result of changes in the variable factor of production.

In the long term, all the factors of production used by the company in the production process are variable. In a long-run two-factor production model, both factors of production (eg, capital and labor) are variable.

In the long term, the level of production of a company can change as a result of changes in any or all factors of production.

Importance

From an economic perspective, every company must have all four factors of production in place for there to be production. Without exceptions.

Also, it is not enough to have all four factors available, they must also be balanced. Too much manpower for work and lack of space to house employees creates inefficiencies.

Lots of ideas and people, but no capital investment means a company won't be able to grow exponentially. Each factor of production must match the demands of the other in order for the business to expand profitably.

The concept of the factor of production is of great importance in modern economic analysis.

Production cost theory

The cost of production theory also depends on the combinations of the factors of production used in businesses and the prices paid for them.

From the point of view of this theory, the factors of production are divided into fixed factors and variable factors. Fixed factors are those whose costs do not change with variations in production, such as machinery.

Variable factors are those whose quantities and costs change with the variation in production. The higher the production, the greater amounts of labor, raw materials, energy, etc. will be required.

As long as a company covers the production costs of the variable factors that it uses, it can continue producing, even if it does not cover the production costs of the fixed factors and generates a loss; however, this is only possible in the short term.

In the long run, it must cover the costs of production of fixed and variable factors. Therefore, the distinction between fixed and variable factors of production is of great importance to business theory.

Economic growth

The purpose of economic organization is to create things that people value. Economic growth occurs when more and cheaper products can be created; This raises the standard of living by reducing costs and increasing wages.

Economic growth is the result of having better factors of production. This process is clearly demonstrated when an economy undergoes industrialization or other technological revolutions. Each hour of work can generate greater amounts of valuable goods.

References

1. Investopedia (2018). Factors Of Production. Taken from: investopedia.com.
2. Wikipedia, the free encyclopedia (2018). Factors of production. Taken from: en.wikipedia.org.
3. Kimberly Amadeo (2018). Factors of Production, the Four Types, and Who Owns Them. The Balance. Taken from: thebalance.com.
4. Prateek Agarwal (2018). Factors Of Production. Intelligent Economist. Taken from: intelligenteconomist.com.
5. Natasha Kwat (2018). Factors of Production: Classification and Importance. Economics Discussion. Taken from: economicsdiscussion.net.
6. Sean Ross (2018). Why are the factors of production important to economic growth? Taken from: investopedia.com.
7. Tom Lutzenberger. Why Are Factors of Production Important in Economics? Bizfluent. Taken from: bizfluent.com.