The
resources used in producing goods and services are known as factors of production. Factors
of production are classified into four. They are 1) land, 2)
labour, 3) capital and 4) entrepreneur. Each of them possesses their respective
features and qualities.
Land
is referred to as all resources given by the nature. e.g. Wealth in
forest, farms, mines, sea, etc. The reward for use of land is rent.
Features and qualities of Land:- It is fixed in supply [The supply of land is
fixed. The supply of land for an individual or a firm or industry may vary, but
the availability of the land in the world is fixed.] It is a Non-renewable resource [We cannot
restore or reproduce the natural resources that we used up.
If
we exploit the resource at the present rate of extraction they are likely to
exhaust. Therefore a policy of conservation of natural resources is a
must for the wise utilisation of the resource without waste.]
Labour is any mental and physical effort of human being. e.g.
service of an engineer, doctor, nurses. Wage is the reward for labour.
Features and qualities of Labour: - Labour is an Inseparable service. Labour cannot be separated from the
labourer. The service of the labourer can be bought or sold, but labourer
cannot. The labour supply is
fixed in short run. The demand for labour is derived demand. It means that the demand for the labour
comes from the demand for the commodity they produce.
Capital is the produced means for further production. e.g.
Machine, tools factory buildings fishing boats.
The reward for capital is interest.
Features and qualities of Capital: - Capital is a man-made resource. Value of capital
depreciates.[ Depreciation
is the amount of wear and tear of capital stock or lowering the value of
capital stock ( reduction in value because of repair and
replacement of parts of machinery and so on.) ]
Fixed capital is that
portion of the total capital that is invested in fixed assets (such as land,
buildings, vehicles, plant and equipment) that stay in the business almost
permanently, or at the very least, for more than one accounting period. Fixed
assets can be purchased by a business, in which case the business owns them,
but also leased, hired or rented, if that is cheaper or more convenient.
Working capital is
calculated as current assets minus current liabilities. Current asset is an asset which can
either be converted to cash or used to pay current liabilities within 12 months
– an accounting period.
Investment is the net addition to the existing stock of capital
stock. [An asset or item that is purchased with the hope that it will
generate income or appreciate in the future. In an economic sense, an
investment is the purchase of goods that are not consumed today but are used in
the future to create wealth.] Net
Investment = Gross Investment - Depreciation
When business use their equipment, it slowly gets worn
down and worn out. Over time, the equipment isn't as efficient, isn't worth as
much, or must be replaced. Thus the capital (another word for equipment) loses
value -- this is called depreciation. It could be that the economy isn't
actually growing if there is an increase in Gross Investment. The depreciation
of the capital could be greater than the growth in Gross Investment, meaning
that there is actually a decrease in capital.
If there is an increase in Net Investment, then you
know that gross investment is greater than depreciation, and the capital stock
is growing, meaning there's more likely to be economic growth
Entrepreneur is the person who combines the factors of production
including the entrepreneur himself. e.g. Owner of a retail shop or
Fishing boat is an entrepreneur. The reward for Entrepreneur is profit.
Features and qualities of Entrepreneur:-
Entrepreneur is the Risk-bearer of unknown future.
(There are two types of risks i.e. insurable like risk of fire or theft and
non-insurable risk such as sales of the product, profit or loss of the firm and
so on.) The primary function of an
entrepreneur is Decision making [Entrepreneur takes the decision
(choice of the best decision from among a set of decisions). 1) What to
produce? 2) How to produce? 3) Where to produce? 4) To whom to produce?
Are the questions to be decided by an entrepreneur?
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