Factors of Production

The four factors of production are land, labor, enterprise and capital. Land This nears the land itself, and any natural resources that come with it.

So oil, natural gas, bauxite, fertile soil, a pleasant climate and sandy beaches are all included in this factor of production. Every business uses some physical space - though, for example, a bank or small home-based business uses much less land than an agricultural business growing sugar.In economic terms, river and marine resources also count as land, for example fish, fresh water, or hydro-electric potential from a fast-flowing river. Economists use the word "rent" to describe the earnings from land as a factor of production - even if it does not take the form of a regular weekly or monthly rent payment.

Land and natural resources are in limited supply. The level of rent is related to scarcity. There is a high rent for resources such as: land in the central business district of the capital city beach-front land with roads and utilities rights to extract minerals, such as oil and gold.Labor This nears human effort in any form - skilled or unskilled, manual or intellectual.

Labor earns wages or a salary in return for participation in the business. The financial capital used to establish the business earns interest. The interest is paid to the lender, who may be a bank, another institution, or an individual lender. Borrowings of financial capital are called debt. Fixed capital is capital tied up in fixed assets, for example buildings, machinery, or vehicles.

These assets will have been acquired with financial capital.Working capital is capital used for day-to-day operations. It includes cash held in the bank, goods for sale, materials for processing and capital for other short-term requirements. Working capital is used to cover wages and immediate requirements, such as utility bills.

Venture capital is risk capital invested in a new business or one which is restructuring, usually for a period of years. The venture capitalist hopes to make a large return on investment when the stake in the business is eventually sold, but also risks losing the whole investment. Sometimes one person may play a role with all four factors of production, and be rewarded accordingly as these quotes illustrate. "The company pays me rent for using two rooms in my house as office and store- room.

" "The company also pays me a monthly salary for my work as manager. " "l made a loan to the company from my own savings when it started up, and the many pays me interest every month. " "We are doing very well at present - there's a satisfactory profit at the end of the year. As the largest shareholder, most of that goes to me. I'm laughing all the way to the bank.

Quick questions 1 For each of the four quotations, which of the four factors of production is the person providing? 2 Which factor of production is connected with each of these? A Rent e Profits b Salary f Natural resources c Debt g Marine resources d Risk Enterprise This is the contribution of the entrepreneur, who takes the risk of initiating the business, and earns profits. The entrepreneur's stake in the business is ladled equity. 182 See chapter 3, section 3. 6 for sources of business capital, and for more on venture capital.

183 See chapter 7 for business finance. PRODUCTION 5. 3 Production and productivity Calculating productivity Labor productivity can be calculated like this: Output of business Number of employees For example: Annual revenue IIS$500,OHO Ten employees Productivity = IIS$50,OHO per employee Annual revenue US$500,oho Five employees Productivity = IIS$OHIO,OHO per employee For some public sector businesses, productivity is harder to measure, because goods or services are provided either at no cost to the user (most overspent schools), or at below their true cost (public water supply in many countries).It may be possible to devise a special measure in these cases - but this has to be carefully done. For teachers, the number of students taught might not be a good measure of productivity.

We can also measure the productivity of land, like this: Value of crops grown of capital: Annual revenue of business used Discussion point Area of land in hectares Or the productivity Total value of capital How could the productivity of teachers be measured? An improved attitude to work, with more effort and better attendance better working notations human resource development, resulting in a better educated and healthier labor force.Productivity is highest in industries where there is a high level of capital investment for each worker. 40,000 Output per worker (US $) The importance of productivity KEY IDEAS Increased productivity may benefit all stakeholders in a business. Improved productivity is important for the national economy.

Productivity is usually greatest in industries with strong capital investment. "l really enjoy my Job - and I have Just completed an advanced engineering course, so I spend a lot of time thinking out ways to improve the production process.Every time I see the boss, I tell him it's time for a salary increase. Annual pay review comes next month. " "We have been waiting all morning for the cement to be delivered. We can't get anything built - and I don't even know if there will be a delivery this afternoon.

" Quick questions 1 Look at Figure 5. 3. 2. Which two industries in Jamaica had the highest productivity? Which one had the lowest productivity? 2 Look at the two quotes above. Explain the problems apparent in each case. 3 Look at the case study about Label House in section 6.

6. How was productivity increased? Who benefited from the hanged? 0,000 20,000 10,oho When productivity increases, businesses can: reduce prices, to the benefit of consumers increase wages, to the benefit of their workers earn a higher profit, to the benefit of the entrepreneur increase production, using the same number of skilled workers save labor costs, by reducing the number of workers. For the national economy, increased productivity can: increase exports, because local goods are more competitive in price encourage growth in output increase wages reduce prices and inflation increase consumer spending, so other businesses benefit from a more rosaceous market.