Factors of Production

Economics is the study of efficient utilization of resources. It enables an individual, firm or an economy to deal with the basic economic problem which arises from scarcity of resources and the unlimited wants of humans. The study of economics also helps economists in making rational decisions for allocation of resources in order to derive optimum utility. Utility is the satisfaction derived from consumption. Scarcity arrives from limited resources and unlimited wants. And it leads to the basic economic problem. To overcome the basic economic problem we must make choices regarding utilization of resources between alternative uses. Choice involves trade off in which we leave one thing for another or have more of one thing and less of the other. This economic decision made leads to opportunity cost. Opportunity cost is the next best alternative forgone in decision making. Decision making is based on the questions what, how and for whom to produce?

An economy is made up of households (consumers), firms (producers) and governments. Firms, households and governments need to make decisions regarding resource allocation. Resources are anything that is used to produce goods and services to satisfy human wants. Since there is a limitation in resources the resources should be used efficiently and effectively so that the period of exhaustion may be prolonged. Resources are also known as Factors of Production which include land, labor, capital and enterprise.

Land is whatever that occurs naturally on earth which might be used for raw materials such as water, wood, metals, oils, gases etc. Land includes all the natural resources.

Labor is a human resource and is the physical or mental effort a human puts into the transformation of raw materials into semi finished and finished forms.

Capital is any man made resource for example assets, buildings, machinery etc.

Enterprise is any kind of risk bearer. An enterprise may be a business organization or an individual. It is a coordinating factor or resource which takes the risk of profit and loss. An enterprise owns, manages and combines land, labor and capital.

Every country has different percentage of resources available in its covered area; a country may differ in different resources or may be abundant in different resources. Factor endowment means differences in resources, some economies may have a greater factor endowment as compared to others. For example, an underdeveloped economy may have more of land and capital but may lack in capital and entrepreneur. Similarly a developed economy may have greater capital and entrepreneur but may be deficient in land and labor.

In this modern time it is assumed that the presence of land, labor and capital automatically generates enterprise. It might not be essential for all the factors of production to coexist all in the same place or in the same environment.