Factors of production is an economic term that describes the inputs used in the production of goods or services in order to make an economic profit.
The 4 Factors of Production are acronym-ed CELL; Capital, Enterprise, Labour, Land
Capital is anything that is used to produce other goods and services rather than being used for its own sake (machinery, tools, offices etc).
There are two main classifications of capital:
Working capital: this is used up in the process of production (raw materials, seeds etc).
Fixed capital: longer lasting and not used up in the production process (machinery, warehouses etc).
This is the decision making and risk bearing in business by an entrepreneur. An entrepreneur has to organise the factors of production, decide what to produce and how much to produce.
Some risks can be insured against (fire, theft etc), but others such as increases in costs of raw materials or increased competition cannot.
The reward for taking the risk and getting it right is profit, however the risk is losing money and being forced out of business.
Labour is the human effort done mentally or physically with the aim of earning wages or salaries. The reward for Labour is Wages/ Salaries.
The supply of labour is determined by the number of workers available and the duration that they can work for.
Factors that affect the supply of labour are:
- Efficiency or Skill of work
- Hours of work
- Retirement age.
- School leaving age.
- Holiday entitlement (again varies between countries).
This refers to all-natural resources which could be used for farming or building, it also includes the resources under the land (oil, minerals metals etc), the resources on the land (mountains, forests, lakes etc) the fish stock in the sea.
The supply of land is relatively fixed but the quantity of resources on/in it can change considerably due to human activities such as mining, fishing, forestry etc. The quality of land can be degraded through erosion or loss of soil quality due to intensive farming techniques.
The reward for Land is rent and it is immobile.
Mobility of factors of production
The mobility of factors of production refers to the extent to which resources can be changed for one another in the production process. Among all the factors of production, Labour is largely pronounced with mobility not denying that other factors of production can become mobile.
Factor mobility can be seen when land used for growing vegetables can be used for building a complex for departmental stores, Capital equipment that are used to produce shoes can also be used to produce bags, Enterprise can also delve into production of other commodities, Dangote that produces cement is also involved in the production of Pasta.
Labour mobility can be broken down into two categories:
Geographical Mobility: This refers to the willingness and ability of a person to relocate from one area to another for employment purposes.
Occupational Mobility: This refers to the ease with which a person is able to change between jobs. The degree of occupational mobility depends on the cost and length of training required to change profession.
Causes of occupational mobility
- Family ties
- Lack of information
- Differences in educational system in different areas and countries
- differences in the price and availability of housing in different areas and countries
Causes of changes in quantity & quality of factors of production
The quantity and quality of factors of production will change if there is a change in demand for and supply of land, labour, capital & enterprise. Possible changes include the following:
- Changes in cost of production
- Government policies
- New technologies
- net migration
- Improvements in Education & Healthcare