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Definition:

Every economy is endowed with what we call resources, which are inputs used in the production of goods and services for consumption to satisfy our needs and wants. The issue of scarcity (shortage – lack – insufficiency) is crucial in understanding economics. Our needs and wants are unlimited and we will never be able to completely and wholly satisfy them, but in any economy the level of resources and the ability to produce goods and services for consumption are limited. We inevitably have to make choices in the way we use our resources.

Four Factors of Production with Examples:

These resources, or factors of production as they are often called in economic texts, are land, labor and capital. Sometimes, the enterprise is included as the fourth factor of production.

(1) Land:

Land is defined as any naturally occurring endowment that an economy has its disposal. This includes for example, soils, crops, mineral deposits, forests, ocean harvests, flora and fauna.

(2) Labor:

Labor is considered to be nay productive physical and mental activity. Shop assistants, fast food workers, sales representatives, teachers, engineers and surgeons are all examples of the labor factor of production.

(3) Capital:

Capital is any good used in the production process to produce other goods. It includes commercial buildings like supermarkets, the car and mobile phone used by a sales representatives, overhead projectors, classroom furniture, and libraries used by teachers, computers used by engineers, and scalpels and operating theatres used by surgeons. Capital is produced by combining land and labor.

(4) Enterprise:

Enterprise is the ability to combine the three other factors of production to produce goods and services to satisfy consumption demands. An entrepreneur, a chief executive officer of a corporation and a business manager all have special skills that are used to produce goods and services for a profit. Profit is the residual return to the entrepreneur after total costs have been deducted from revenue.

Features or Characteristics of Factors of Production:

These four factors of production; land, labor, capital and enterprise have some essential features or characteristics, given below:

(i) They are scarce. At any point of time, there is a fixed, finite amount of the resource which is insufficient to satisfy the demands for it.

(ii) They have alternatives uses. Any factor of production can be used to satisfy needs and wants, but not at the same time. A choice among the alternatives becomes necessary. A building in the city could be used as office space, student residential accommodation, expensive and exclusive apartments, or converted to a casino, a library, restaurants or an amusement arcade. It could be any one of these over time, but it cannot be all of them at the same time.

(iii) The quantity of resource varies. Every country has different physical amounts of resources, which affects production and consumption decisions. The quantity of resources is relatively fixed but it can change over time as new resources are discovered or populations increase. A country with a rising birth rate is in the long term increasing its labor resource, which will in turn place increased demands on other resources such as housing, education and health services.

(iv) The quality of a resource varies. The productivity of resources can vary in different economies. The quality of resources can be altered through the application of new technology, education and training. Policies to encourage students to complete their secondary schooling and undertake tertiary studies are attempts to improve the quality of the labor resource.

A choice must be made by individuals and by societies in confronting the problem of limited resources but unlimited needs and wants.