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4 Factors of Production - Methods, Inputs and Resources

In this article, I have talked about four factors of production as per the tradition classification. Apart from this, the modern view has also been taken briefly and the process of production and its efficiency has also been discussed graphically. Before this, you may like to read the Theory of Production.

What are Factors of Production

Resources, inputs and factors of production are synonyms; they are commodities and services transformed into output. There are things required for making commodities. In modern terminology, they would be referred to as 'inputs'. In economics, inputs are also referred to as resources or factors of production. All these names apply to the same thing; they are commodities and services transformed into output. The process of transformation of resources is known as the process of production. We make note of the fact that output, which is the end of the process of production, may become an input used in another process of production. For example, coal, capital, labour and water are inputs in the production of electricity. Electricity is an input in the production of bread. Bread is the final output. Final outputs are goods.

Traditional Classification

The factors of production have traditionally been classified by economists under land, labour, capital and enterprise, respectively. These factors are also called inputs and the production is called output.

Land

By land, we mean, not merely soil, as is commonly understood, but all the natural resources on land, in water and air available to economic agents. It also includes natural resources. Whatever is naturally available to the producer is classified under Land. This factor is supplied by the landlords. The remuneration for the land is called Rent.

Labour

Labour means not merely the work of a coolie or and unskilled labourer but all types of work - mental and manual - undertaken for getting an income. Any type of work undertaken for getting an income is called Labour in Economics. Even the work of the President is considered labour in Economics because he/she is paid for their service. This factor is supplied by the labourers. The remuneration for the labour is called Wage.

Capital

Capital means not only cash used in business but it also includes tools, machinery and appliances used in production. This factor is supplied by the capitalists. The remuneration for the capital is called Interest.

Enterprise

Enterprise is the work of bringing the above three factors together and making them work harmoniously and taking risks in order to gain a profit out of the production process. This includes the process of rewarding them for their labour too. Thus, it means not only the organisation of business but also taking its risk due to uncertainty of profit or loss. This factor is supplied by the entrepreneurs. The remuneration for the enterprise is called Profit.

Modern View

Economic thinkers of today contend that the factors of production are neither two nor four but millions. Anything that goes into production is a factor. Every acre of land is a factor by itself, and so is every worker, each rupee, and each individual entrepreneur. There are millions of each of the factors. Indeed the number is incalculable. The utmost we can do is to group together all similar lands; all similar workers; all similar machines and all entrepreneurs in the same line and count each group as one factor. But even thus the number of factors would run into thousands. However, adherence to the old four-fold classification of the factors of production makes a convenient and clear study of the theory of production. Generally, the number of factors of production is narrowed down to two factors, labour and capital, for the sake of convenience in the analysis of economic theory.

Fixed and Variable Inputs or Factors

Fixed Inputs

In most production processes, it is possible to identify certain inputs that contribute to production but cannot be increased or decreased in order to change the level of output for a sufficiently long period of time. These are called fixed inputs.

Variable Inputs

These inputs, as the name implies, can be varied according to the desired level of output. For example, in manufacturing, the building is considered a fixed input because it cannot be readily changed to different size; and variable inputs include such things as labour, raw materials and fuel. However, over a long period, the building can be changed in size and the new one constructed, so even a fixed input can be called variable for a longer period of time in which it can be varied.

Relative Importance of the Factors or Inputs

It is really difficult to say which input is more important and which less. It is just like asking whether hands are more important or eyes to the human body. All of them seem to be equally important and each has a special function to perform.
Land supplies space for economic operations; it provides the raw materials. Human life without land is inconceivable. But what can land do alone? Man must work on the land in order to increase production. Labour, therefore, is equally essential. Through man's efforts production has been immensely increased and diversified. Capital fulfils a real need. Unaided by tools, man cannot produce much. A community mainly depending on the land and its material is condemned to appalling poverty forever. Mechanization is an order of the day and for this capital is essential. The entrepreneur, or organizer, also plays a very essential part of the production. It is under this leadership that production goes ahead and breaks new ground.
Thus, all inputs are necessary for modern production. The relative importance of the inputs varies from industry to industry. In industries, where raw material costs are very heavy, we might say that land is more important and where costly machines are used, capital is more important, and so on.

Methods of Production

A production process is a combination of factor inputs required for the production of one unit of output. Usually, a commodity may be produced by various methods of production. For example, a unit of commodity q may be produced by the following processes shown in tabular form.
The production process may be represented graphically by the length of lines from the origin to the point determined by the labour and capital inputs. Three processes have been shown below in both tabular form and graphical form.

Process - 1Process - 2Process - 3
Labour Units234
Capital Units321
process of production - graphical representation with two factors of production

The table and the diagram above shows how different processes can be applied to produce a given quantity. In the diagram above, the thin line I represent the given quantity of output that can be produced by different processes.
Process - 1 requires 2 units of labour and 3 unit of capital. Process two requires 3 units of labours and 2 units of capital. Lastly, Process - 3 requires 1 unit of capital and 4 units of labour. Thus, the same amount of output can be produced using different processes of production. For instance, you can cultivate 10 acres of land in one day using many labours with hand-held equipment or the same job can be done using only one labour with a tractor. The difference between different processes is that some processes need more labour than capital and some processes need more capital than labour or there may be a balance between the two. Now, let us discuss which process is efficient.

Efficiency of Production Process

Technical Efficiency

A method of production, say, A is technically efficient relative to any other method, say, B if A uses less of at least one factor and no more or other factors as compared to B. Let us try to understand it using the following table. Suppose you have to produce one unit of a product and you have two methods to produce it, namely, Method A and B.

Method AMethod B
Labour23
Capital33

As you can see in the table above, Method A requires 2 units of labour and 3 units of capital to produce one unit of the commodity while Methods B requires 3 units of both the commodity. Since Method A requires one less unit of labour and equal units of capital in comparison two Method B, Method A is technically more efficient than Method B. A rational producer will not choose Method B because it is an efficient process of production.

Economic Efficiency

Read the table below. Which method do you think is more efficient?

Method AMethod B
Labour21
Capital34

As you can see in the table above. Method A uses less capital and more labour than Method B. In such a case, neither of the methods is efficient or both are efficient. Therefore, technical efficiency is not directly comparable here and we need another parameter to decide which production process is more efficient.
Economic efficiency refers to the combination of factors of production which costs the least to produce one unit of output. Thus, the basis of economic efficiency is the prices of factors of production. Hence, choosing an efficient process of production is an economic one.
To be precise, technically efficient method is not necessarily an economically efficient method of production. Producers generally target profit maximization, so the minimum possible cost of production is their priority. Therefore, the cost of factors of production plays a decisive role in the producer's behaviour.

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