Lecture on FACTORS OF PRODUCTION by Mr Boolaky Manish @ All Right Reserved MANISH BOOLAKY NOTES DEFINITION OF FACTORS OF PRODUCTION Factors of production are the resource inputs needed by producers in order to create an output of goods and services. Factors are the basic ‘building blocks’ of economic activity. There are four basic factors, including land and natural resources, labour, capital and enterprise FACTORS OF PRODUCTION DEFINITION EXAMPLE REWARD Land It refers to all natural resources involved in the production of goods and services. Sunshine, Rent wind, soil,waterfall Labour It refers to all mental and physical efforts involed in the production of goods and services. Welder, teacher, carpenter Wages Capital It refers to all man-made material involved in the production of goods and services Raw Materials, money, building, equipment & machinery Interest Enterprise It refers to all person to takes decision of how to Owner, CEO, organize resources and bears of the risk. Director, Manager Profit Supply in the factors of Production Supply of Factors of Production refers to changes in the supply of Land,Labour,Capital and Enterprise. The Factors of Production can increased and decreased as well. The Supply of Land The amount of physical land in existence does not change much with time. There is a certain degree of soil erosion which reduces the supply of arable land but also a certain amount of land reclamation which increases its supply. Other natural resources, however, can change quite significantly. Rainforests are currently declining at a rapid rate. Some natural resources are renewable whilst others are nonrenewable. Renewable resources, for instance wind power, are replaced by nature and hence can be used again and again. In contrast, non-renewable resources, e.g. gold and oil, are reduced by use. There is a risk that renewable resources can be turned into non-renewable resources if they are over-exploited, that is used at a faster rate than they are replenished. Overfishing and the hunting of wildlife can diminish numbers to a point where they cannot be restored. The supply of labour The supply of labour is influenced by two key factors. One is the number of workers available and the second is the number of hours for which they work. The number of available workers is determined by: i. The size of the population: The larger the population, the more workers there are likely to be. ii. The age structure of the population: A country with a high proportion of people of working age will have more workers than a country with the same population size but a higher proportion of younger or older people. iii. The retirement age: The higher the retirement age, the more potential workers there will be. iv. The school leaving age: Raising the school leaving age would reduce the number of workers. v. Attitude to working women: Countries, where it is acceptable for women to work, have more workers to draw on. Those people who are working or are seeking work form, what is known as, the labour force. This is also known as the workforce or working population. Those of working age are people between the school leaving age and the retirement age. In the UK, this covers people aged between 16 and 65. Not all of these people, however, are in the labour force. Some may be in full time education, some may have retired and some may be sick or disabled. The number of hours, for which people work, is influenced by (among other factors): i. The length of the average working day. For instance, full time workers in USA tend to work for longer hours than those in the European Union. ii. Whether they work full or part time. For example, more people in the UK work part time than those in France. iii. The duration of over-time. iv. The length of holidays availed by workers. v. The amount of time lost through sickness and illness. The Supply of Capital The supply of capital tends to increase with time. Every year some capital goods physically wear out and some become out-dated. A farm barn may fall down, for instance, and some machinery may be replaced by newer, more efficient machinery. New capital goods, however, usually supplant those goods, which firms are unable (or choose not) to use any more. Some of the capital goods being produced will be replacing those which have worn out or become obsolete. The value of replacement capital is called depreciation or capital consumption. The Supply of Entrepreneurs: A good education system, including university degree courses in economics and business studies, may help to develop entrepreneurs in an economy. Lower taxes on firms’ profits (corporate taxes) and a reduction in government regulations may encourage more people to set up their own businesses. Sometimes, a disproportionate number of immigrants become entrepreneurs. These are people who have had the drive to leave home in search of a better life and this drive often leads them to become entrepreneurs in the new country Mobility of Factors of Production Factor mobility refers to what extent the factors of production can easily switch between different alternatives or location without loss of efficiency. Occupationally Mobile means capable of changing the use Geographically Immobile means incapable of moving from one location to another location Mobility of Land Land is quite obviously geographically immobile. For example land cannot be moved from country to another one. However, some forms of land, in its wider meaning, can be moved to a certain extent. For example, the course of rivers can be diverted and wildlife can be moved. Land is occupationally mobile. For example, trees can be used to make tables, chairs and paper. Land can be used to construct roads, airports, parks, houses and farms. Mobility of Labour Labour might find it difficult to move from one job to another that is occupationally immobile due to differences in salaries, work environments, training and knowledge. For example an accountant cannot become a doctor immediately after quitting his job. Labour can be geographically immobile when: Differences in the price and availability of housing in different areas and countries. Workers who lose their jobs in poor areas may not be able to take up jobs in rich areas because they cannot afford or find housing there. Family ties People may be reluctant to leave the country they are currently living in because they do not want to live far from their friends and relatives. Differences in educational systems in different areas and countries People may not be willing to move to a job elsewhere if it disrupts their children’s education. Lack of information about the job opportunities elsewhere People without jobs or those in poorly paid jobs may stay where they are because they are unaware of job opportunities elsewhere. Language and immigration policies of the different countries Language used in different countries can act as a barrier for movement of workers. It is often necessary to obtain a work visa to work in another country and these can be limited in supply Mobility of Capital Some capital equipment is both geographically and occupationally mobile. Electric motors, machine tools, hand tools and lorries are examples where they can be moved from one location to another and then in different industries. A delivery van can be used by the toy company to deliver its toys around the island. This is a case where capital is geographically mobile. An office block can be used as a call centre or accountancy firm which means that capital can be occupationally mobile. However, capitals such as railway networks and shipyards are geographically immobile. The cost of dismantling these capitals to another location will certainly outweigh the advantages of moving the capital. A coal mine is fixed in position and so it is geographically immobile. Mobility of Enterprise Enterprise is the most mobile of the factors of production. Whatever the type of the economic activity, there will be a need to raise capital, to take risks and make fundamental decisions on for whom, what and how to produce. Hence, the entrepreneur is occupationally mobile as he/she will be able to borne risks and organised factors of production in the car industry as well as in a textile industry. An enterprise is also geographically mobile. An entrepreneur who was able to start up and run successfully a business in one country has a great probability to gain success in another area or country. Quality of Factors of Production Improving the Quality of Land The fertility of soil can be improved through use of fertilizers, mechanization, irrigation and better use of quality seeds. The purity of rivers and the health of fish in the rivers can be improved by stopping firms from polluting the rivers. A reduction in air pollution can improve the quality of air. A control over the tourism industry may improve the beaches and prevent environment disaster. The quality of labour can be increased as follows: Education and Training An increase in the number of schools, colleges and universities together with more training centers and an improvement in the quality of education will improve the quality of the labour force. This will generate more skilled, qualified and trained workers. Provision of better tools and equipment to workers will allow them to become more productive. Better wages, fringe benefits and improved working environment and facilities will provide more incentive to work and improve the quality of labour. Specialisation and division of labour will generate more specialist workers. The more specialisation in an industry, the better will be the workers. Improving the Quality of Capital The quality of the capital goods can be improved with more research, development activities and innovation. The introduction of new technology or technological progress made by the country will improve the quality of capital. For example, the development of robotics in car production has increased significantly the number of cars that can be produced. Improving the Quality of Enterprise Training and workshops organised for actual and prospective entrepreneurs will improve the quality of the entrepreneurs in the country. Talk, seminars or targeted workshops for entrepreneurs may improve their entrepreneurial skills. Hence the quality of enterprise can be improved if entrepreneurs receive better education, better training, better healthcare and gain more experience. MOBILITY OF FACTORS OF PRODUCTION Factor mobility measures the extent to which factor inputs such as land, labour and capital can easily switch between alternative uses with no loss of efficiency. The mobility of land Most land is occupationally mobile. This means that it can be used for a number of purposes. Land which is currently being used for farming may instead is used to build houses. Trees can be used to make tables or sleepers for railway lines. Land, in its traditional sense, is however geographically immobile. It is not possible to move a section of land from Sri Lanka to India, for instance. Some forms of land, in its wider meaning, can be moved to a certain extent. For example, the course of rivers can be diverted The Mobility of Labour: The mobility of labour varies. Some workers may find it difficult to move from one area of the country to another or from one country to another (geographical immobility) and some may find it difficult to switch from one type of job to another type (occupational immobility). The causes of geographical immobility include: i. Differences in the price and availability of housing in different areas and countries: Workers who lose their jobs in poor areas may not be able to take up jobs in rich areas because they cannot afford or find housing there. ii. Family ties: People may be reluctant to leave the country they are currently living in because they do not want to live away from friends and relatives. iii. Differences in educational systems in different areas and countries: People may not be willing to move to a job elsewhere if it disrupts their children’s education. iv. Lack of information: People without jobs or those in poorly paid jobs may stay where they are because they are unaware of job opportunities elsewhere. v. Restrictions on the movement of workers: It is often necessary to obtain a work visa to work in another country and these can be limited in supply. There are also a number of causes of occupational immobility. Again there may be a lack of information about vacancies in other types of jobs. The main cause, however, is a lack of appropriate skills and qualifications. A shortage of doctors cannot be solved by hiring street hawkers The Mobility of Capital The geographical and occupational mobility of capital varies according to the type of capital goods. Some types of capital goods can be transferred from one part of the country to the other. A photocopier used by a bank in one area of a country can be sold to and then used by a bank in another area. A coal mine and a dock, however, are fixed in position and so are geographically immobile. They are also occupationally immobile since their use cannot be changed, as they have been made for a specific purpose. In contrast, a delivery van, used originally by a book publisher may be bought and employed by a toy manufacturer to distribute its products. Similarly, an office block may be used for a variety of purposes. It may house a call centre or an accountancy firm. The mobility of enterprise Enterprise is the most mobile factor of production. The skill involved can be applied in every industry. Someone who has borne uncertain risks and organised factors of production in the car industry should be able to do this in, for instance, the textile industry too. Apart from being occupationally mobile, enterprise is also geographically mobile. Someone who has been successful in starting up and running a business in one country is likely to be successful in another country also IMPROVING THE QUALITY OF LAND The fertility of soil can be improved through mechanization,irrigation,use of fertilisers, better quality seeds and so on. A reduction in air pollution can improve the quality of air. A control over the tourism industry may improve the beaches and prevent environment disaster. Improving the quality of Labour Education and training-An increase in the number of schools, colleges and universities together with more training centers and an improvement in the quality of education will improve the quality of labor force. This will generate more skills ,qualified and trained persons. Provision of better tools and equipment to workers will allow them to become more productive. Better wages and fringe benefits ,better working conditions and other facilities will provide more incentive to work and improve the quality of labour. Specialisation and Division of Labour will generate more specialist workers.The more specialization in an industry,the better will be the workers. Improving the quality of Capital The quality of the capital goods can be improved with more research and development activities and innovation. The introduction of new technology or technological progress made by the country will improve the quality of capital. Improving the quality of Enterprise Training and Workshops organized for actual and prospective entrepreneurs will improve the quality of the entrepreneurs in the country. Talk, seminars or targeted workshops for entrepreneurs may improve entrepreneurial skill.
