Factors Of Production

Note

What we learned from this video?

-         What do we understand by “Factors of Production”?

-         What is a Production Process?

-         The Four Factors of Production?

-         What are Factor Mobility & Immobility?


Factors of Production in a nutshell:


Factors of Production refer to any input in the production process, through which we get an output. Once prepared, these outputs can be sold to consumers to make an “Economic Profit.”


Side Note: What’s Economic Profit?


You’ll often be asked to differentiate between Accounting Profit & Economic Profit. Before we go into Economic Profit, let’s look at Accounting Profit first. Accounting Profit is the difference between the monetary revenue a company makes and the monetary costs they bear to make that revenue. In essence, it is the usual concept of profit we use in our day to day lives.

In contrast, an Economic Profit refers to that same profit (Monetary Revenue – Monetary Cost) with only one difference. Opportunity cost is deducted from the revenue earned. Therefore, it is calculated using the following formula:

Economic Profit = Total Monetary Revenue – (Total Monetary Cost + Opportunity Cost)


What’s a Production Process?


The method using which raw materials are turned into finished products is known as Production Process. As seen from the example in the video, raw woods are taken to factories where they go through various manufacturing processes and come out as finished, completed furniture. Examples could vary from Chairs, Tables, Beds and more.

Hence, this process of turning the raw wood into a finished product is known as the Production Process.


Let’s learn about the 4 Factors of Production



As the heading suggests, there are mainly 4 Factors of Production. Let’s briefly learn about each factor!

1)     Land: Land refers to all natural resources that are used in the production of goods & services. Examples would include Forest, Oil, Timber, Fisheries and more. Natural resources are of two types, renewable and non-renewable. We will learn more about them later.


2)     Labor: Labor refers to the physical and mental efforts of human beings in the Production Process. Workers and employees would be the best examples for Labor.


3)     Capital: Capital refers to the man-made machineries, equipment and finance needed for the production of goods & services.


4)     Enterprise: Enterprise, also known as Entrepreneurship, combines & organizes the other 3 factors of production. This person undertakes all risks and faces the uncertainties to make a business that creates goods & services, using the previous three factors of production. Some iconic entrepreneurs of our time include Steve Jobs (Apple), Elon Musk (SpaceX, Tesla, PayPal & Neuralink), Bill Gates (Microsoft & Gates Foundation), Jeff Bezos (Amazon) and more.


Factor Mobility:


The ease at which things can be moved or changed is known as Mobility. Factors of Production can be mobile mainly in two aspects. The first being Geographically Mobile while the second one is Occupationally Mobile.

Factors that are Geographically Mobile can be physically moved from one place to another. Taking the example from the video, a teacher can be transferred from one location to another, which makes them Geographically Mobile. In the same way, through training, a math teacher can be trained to take science classes as well; which makes them Occupationally Mobile as well.



Factor Immobility:


In contrast, Factor Immobility means the factor cannot be moved or changed easily. It is again mainly of two types, Geographically Immobile & Occupationally Immobile.

If we take Capital as an example, a large machinery used in a production process would be difficult to move from one factory to another, which makes them Geographically Immobile. In the same way, a machine that is made to do one task, cannot do another task. For instance, a sewing machine is used to sew clothes. It cannot be used for other work, which makes it Occupationally Immobile.


Case Study: One for the Foodies


You’ve been a food enthusiast all your life and your dream is to own a small pizzeria. One fine day, you get up motivated from your bed and decide to start your restaurant. You find the ideal place, a small cozy find where you decorate with antique furniture and art. Every natural resource used in your restaurant, starting from the land you bought to start the restaurant to the wooden furniture you designed for the interiors, will be counted as Land.

Next comes Labor. No one can do it all on their own. You need to hire the right chef, the right supply team, the right waiters and the list goes on. These employees of yours will fall under Labor.

Along with Labor, you would also need machineries, equipment and finance to smoothen your operation. These include machines used to cook food, the money to buy supplies and pay salary and more. These will be counted as Capital.

Lastly, you – the person who brought all the other factors of production together and took the risk of starting this business, would be counted as Enterprise. You’re the entrepreneur who’s ready with the restaurant that will change the food industry in your country, so what are you waiting for? Let’s go into production!

You have the perfect team and all that awaits is starting operations. You have to get the ingredients from your suppliers and get your chef to cook the perfect Italian Pizza. The process of getting the ingredients, processing them with the help of the chef and his/her machines to get the delicious Pizza is known as the Production Process. The pizza would then be sold to hungry customers to make Economic Profit.