Definition, Types and Factors of Production


Definition, Types and Factors of Production

What is production?

Production is the process whereby some goods and services are transformed into other goods. The transformed goods are known as inputs, factors or resources and the newly created goods are called products, outputs or yield in the case of crops.


Types of Production

There are basically three types of production namely:

a. Primary production

b. Secondary production

c. Tertiary production

a. Primary Production

This includes all branches of production that may not be easily consumed at the initial stage but used for further production. For example, production of cassava, mining and quarrying are all classified as primary production.

b. Secondary Production

This production comprises of all kinds of manufacturing and constructing works i.e. turning the new materials produced in primary production into finished goods.

c. Tertiary Production

This type of production involves the provision of direct services such as the distribution of goods


What are the factors of Production?

The factors of production are an important economic concept outlining the elements needed to produce a good or service for sale. They are commonly broken down into four elements: land, labor, capital, and entrepreneurship. However, commentators sometimes refer to labor and capital as the two primary factors of production. Depending on the specific circumstances, one or more factors of production might be more important than the others.

Factors of production are primarily derived from a neoclassical view of economics. It amalgamates past approaches to economic theory, such as the concept of labor as a factor of production from socialism, into a single definition. 

Land, labor, and capital as factors of production were originally identified by early political economists such as Adam Smith, David Ricardo, and Karl Marx.

The resources used for the production of a product are known as factors of production.

Factors of production are termed inputs, use of which may mean the services of land, labour, capital and organization in the process of production.

Today, capital and labor remain the two primary inputs for processes and profits. Production, such as manufacturing, can be tracked by certain indexes, including the ISM manufacturing index.

Land as a factor of production

The term land is used in the widest sense to include all kinds of natural resources, farmland, mineral wealth such as coal and metal ores and fishing-grounds. Perhaps the main services of land are the provision of a site where production can take place.

Land differs fundamentally from other factors in three ways:

i. It is fixed in supply

ii. It has no cost of production

iii. It varies in quantity

Land has a broad definition as a factor of production and can take on various forms, from agricultural land to commercial real estate to the resources available from a particular piece of land. Natural resources, such as oil and gold, can be extracted and refined for human consumption from the land. Cultivation of crops on land by farmers increases its value and utility. For a group of early French economists called “the physiocrats,” who predated the classical political economists, land was responsible for generating economic value.

While land is an essential component of most ventures, its importance can diminish or increase based on industry. For example, a technology company can easily begin operations with zero investment in land. On the other hand, land is the most significant investment for a real estate venture.


Labor as a Factor of production

Labour is the human effort employed in production. It is indispensable to all forms of production. The supply of labour services can be varied either by a change in the number of hours or days worked in a given period of time.

The supply of a labour in a country depends on these three factors:

i. The total population of the country.

ii. The proportion of the population available for employment.

iii. The number of hours worked by each person per year.

Labor refers to the effort expended by an individual to bring a product or service to the market. Again, it can take on various forms. For example, the construction worker at a hotel site is part of labor, as is the waiter who serves guests or the receptionist who enrolls them into the hotel.

Within the software industry, labor refers to the work done by project managers and developers in building the final product. Even an artist involved in making art, whether it is a painting or a symphony, is considered labor. For the early political economists, labor was the primary driver of economic value. Production workers are paid for their time and effort in wages that depend on their skill and training. Labor by an uneducated and untrained worker is typically paid at low prices. Skilled and trained workers are called “human capital” and are paid higher wages because they bring more than their physical capacity to the task.

For example, an accountant’s job requires the analysis of financial data for a company. Countries that are rich in human capital experience increased productivity and efficiency. The difference in skill levels and terminology also helps companies and entrepreneurs create corresponding disparities in pay scales. This can result in a transformation of factors of production for entire industries. An example of this is the change in production processes in the information technology (IT) industry after jobs were outsourced to countries with lower salaries.

Capital as a Factor of production

Capital comprises of buildings, machinery, raw materials, partly finished goods and means of transport i.e. capital is considered as a stock of producers‟ goods used to assist in production of other goods.

In economics, capital typically refers to money. However, money is not a factor of production because it is not directly involved in producing a good or service. Instead, it facilitates the processes used in production by enabling entrepreneurs and company owners to purchase capital goods or land or to pay wages. For modern mainstream (neoclassical) economists, capital is the primary driver of value.

It is important to distinguish personal and private capital in factors of production. A personal vehicle used to transport family is not considered a capital good, but a commercial vehicle used expressly for official purposes is. During an economic contraction or when they suffer losses, companies cut back on capital expenditure to ensure profits. However, during periods of economic expansion, they invest in new machinery and equipment to bring new products to market.

An illustration of the above is the difference in markets for robots in China compared to the United States after the 2008 financial crisis. After the crisis, China experienced a multi-year growth cycle, and its manufacturers invested in robots to improve productivity at their facilities and meet growing market demands. As a result, the country became the biggest market for robots.

 Manufacturers within the United States, which had been in the throes of an economic recession after the financial crisis, cut back on their investments related to production due to tepid demand.


Entrepreneurship as a Factor production

Entrepreneur describes the managerial ability of the owner of the firm or its manager. The entrepreneur is responsible not only for deciding what method of production shall be adopted but also for organizing the work of others, he has to make many other important decisions such as what to produce and how much to produce. Perhaps the primary function of the entrepreneur is to bear the risk and uncertainty of production.

Entrepreneurship is the secret sauce that combines all the other factors of production into a product or service for the consumer market. An example of entrepreneurship is the evolution of the social media behemoth Meta (FB), formerly Facebook.

Mark Zuckerberg assumed the risk for the success or failure of his social media network when he began allocating time from his daily schedule toward that activity. When he coded the minimum viable product himself, Zuckerberg’s labor was the only factor of production. After Facebook, the social media site, became popular and spread across campuses, it realized it needed to recruit additional employees. He hired two people, an engineer (Dustin Moskovitz) and a spokesperson (Chris Hughes), who both allocated hours to the project, meaning that their invested time became a factor of production.

The continued popularity of the product meant that Zuckerberg also had to scale technology and operations. He raised venture capital money to rent office space, hire more employees, and purchase additional server space for development. At first, there was no need for land. However, as business continued to grow, Meta built its own office space and data centers.7 Each of these requires significant real estate and capital investments.

What Are Examples of the Factors of Production?

Land refers to physical land, such as the acres used for a farm or the city block on which a building is constructed. Labor refers to all wage-earning activities, such as the work of professionals, retail workers, and so on. Entrepreneurship refers to the initiatives taken by entrepreneurs, who typically begin as the first workers in their firms and then gradually employ other factors of production to grow their businesses.

Lastly, capital refers to the cash, equipment, and other assets needed to start or grow a business.


Other Concepts in Production

The concepts discussed below are adopted from Reddy et al. (2009):

1.  Resources

Anything that aids in production is called a resource. They physically enter the production process to transform into output. For example seeds, fertilizers, feeds, veterinary medicines etc.

Resources can be classified into the followings:

i. Fixed Resources: Resources which remain unchanged irrespective of the level of production are fixed resources. These resources exist only in the short run. The costs associated with these resources are called fixed costs. Farmer has little control over the use of these resources. For example; land, buildings, machinery implements etc.

ii. Variable Resources: Resources which change with the level of production are called variable resources. The higher the level of production, the greater the use of these resources. The costs which are associated with these resources are called variable costs. These resources exist in the short run as well as long run.

Farmer can exercise greater control over the use of these resources. Examples are: seeds, fertilizers, plant protection chemicals, feed etc. The distinctions between fixed and variable resources cease to exist in the long run. In the long run all resources are varied.

iii. Flow Resources: The resources which cannot be stored and should be used as and when they are available. For instance, if the services of a labourer available on a particular day are not used, then they are lost forever, similarly, the services of machinery and farm buildings etc.

iv. Stock Resources: Stock resources are those which facilitate for their storage when they are not used in one production period. Examples are: seeds, fertilizers, feed etc.

2. Productivity

Productivity denotes the efficiency with which various inputs are converted into products. It signifies the relationship between output and inputs. In simple terms, output per unit of input is called productivity. For example productivity can be expressed as 10kg of output/ha.

3.  Efficiency

Efficiency means absence of wastage or using resources as effectively as possible to satisfy the farmer’s need and goals. Efficiency can be expressed in the following ways:

i. Technical Efficiency: It is the ratio of output to input

ii. Economic Efficiency: It is the expression of technical efficiency in monetary value by attaching prices. In other words, the ratio of value of output to value of input is called economic efficiency. It is the maximization of profit per unit of input.

iii. Allocative Efficiency: It occurs when no possible organization of production can make any one better off without making someone else worse off. It refers to resource use efficiency. It is an ideal situation in which costs are minimum and profits are maximum.

4. Variable

Any quantity which can have different values in the production process.

Other concepts associated with variable are:

i. Independent Variable: it is a variable whose value does not depend on other variables. Such variables influence the dependent variable. Examples are: land, labour, liquid money, fertilizer etc.

ii. Dependent Variable: A variable that is governed by another variable. Example is crop output.

iii. Constant: A quantity that does not change its value in a general relation between variables.

iv. Coefficient: When rate per unit is calculated we use the term coefficient, a multiplying factor. For example;

(a) The regression coefficient of an input to production function denotes response of output per unit of input

(b) Elasticity coefficient of input gives the percentage change in crop output per one cent increase in input level.

(c) Technical coefficient refers to requirements of inputs per unit of land or per unit of crop output.

5. Slope

Slope of a line represent the rate of change in one variable that occurs when another changes i.e. it is the rate of change in the variable on the vertical axis per unit of change in the variable on the horizontal axis.

Slope is always expressed as a number. Slope varies at different points on a curve but remains the same on all points of a given line.

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