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Lesson Note

Subject: Economics
Topic: Factor of Production.

Lesson Objectives: by the end of the lesson the learners should be able to:
1. Define the terms land, labour, capital and entrepreneur and explain each as factor of production;

2. State the characteristics of the above mentioned factors of production;

3. Discuss why each factors of production are important.

Lesson Summary

Factors Of Production


We learnt in the first phase of this topic where we discussed production that before any output is actualized, inputs are required. There is a lot of input in any production activity. Take for instance, in producing a car, you will require tyres, engines, glasses, leather materials, flat sheets, bolts and nuts. A baker will need flour, sugar, baking powder, ovum, etc for baking. As one move from one production to another, input requirements changes. Whatever is used as an input in the production process to achieve a given level of output is termed factor of production. And so, economists have generally over the years identified four factors of production and where they broadly and sufficiently defined, any output will use at least one of the four factors. On this note one can define factors of production as agents, components or resources which are combined together to produce goods and services.

The four factors common nature over the years are land, labour, capital, and entrepreneurship with each having peculiar characteristics to justify its classification. Each of these factors are broadly explained below

A. Land

What is land?

Land is defined in economics as a free gift of nature. Land in economics does not only include land surface of the earth but all other free gifts of nature or natural resources such as forest, mineral resources, rivers, oceans, atmosphere, etc. Unlike other factors of production, the supply of land is limited. The reward for land is rent.

Characteristics or Features of land

  1. Land is immobile: This means that land can not be moved from one geographical location to another.
  2. The Supply of land is fixed: It is practically impossible for man to increase the quantity of land.
  3. Land is a free gift of nature: Land is given freely by nature.
  4. Land is subject to diminishing returns: When a piece of land is frequently brought under cultivation, it becomes less productive.
  5. Variability: The quality and value of land varies from one place to another as some areas of land are more fertile than others.
  6. Rent: The reward for land is classified as rent.
  7. Land has is heterogeneous: This implies that no two parcels of land are the same in value or in other characteristics.
  8. Land has no cost of production: No cost was involved in bringing land to existence.

Importance of land as a factor of production

  1. Farming purpose: land is used for the cultivation of both food and cash crops, e.g maize, yam, cocoa, etc. Water provides irrigation for farming activities in dry season.
  2. Livestock purposes: land is also used for livestock production (i.e rearing of animals), e.g cattle, sheep, goat, poultry, etc.
  3. Fishery purposes: land is used for fishery in rivers, seas and oceans. Fish ponds are also developed.
  4. Wild life purposes: land is used for wild life conservation, e.g game reserves, and national parks.
  5. As collateral security: land which possess certificate of occupancy (C of O) is used widely as collateral to secure loans from banks, especially in urban centres.
  6. Social or recreational purposes: land is used for social or recreational purposes such as stadia, schools, markets, cemeteries, etc.
  7. Construction purposes: land is used for construction purposes, e.g roads, airports, railway, etc. Sand, stone, gravel, granite, etc, serves as raw materials for building and road construction.
  8. Residential buildings: Residential buildings and housing estates are sited on land.
  9. For industrial buildings: industrial buildings are also sited on land.
  10. Sources of minerals: land is the source of minerals like limestone, gold, tin, petroleum, etc, which serve as revenue to the government.
  11. Transportation purposes: land, air and bodies of water like rivers, oceans, lakes, etc, serve for transportation of people and goods from one place to another.

B. Labour As A Factor Of Production

Labour as factor of production is defined as all forms of human efforts put into or utilized in production. It also refers to man’s mental and physical exertions generated in the process of production.

Human beings provide the necessary labour which combines with other factors to provide goods and services. The reward for labour as a factor of production comes in form of wages and salaries.

Types of Labour

There are three main types of labour. These are:

  1. Unskilled labour: This category of labour requires little or no formal education. They do not use mental effort, rather, they make use of physical effort or energy in production, hence their jobs are popularly referred to as brown collar jobs. As a result of their low level of education, with some kind of training, they are usually employed as guards, messengers, cleaners, gardeners in companies and other places of employment.
  2. Semiskilled labour: This sets of labour requires a minimum standard to perform effectively, though such a standard itself might not be peculiar to such a group. Examples are drivers. To drive, one require a minimum driving skill, but any other profession could acquire such a skill in a very short time. Semiskilled labour could be achieved based on what is called ‘on-the-job’ training, in which one can easily be trained to do certain job even without a high level of education. Education is a major criteria in labour classification.
  3. Skilled labour: This category of labour makes use of their mental effort in productive activities. This labour has undergone a relatively long and specialized type of training in institutions of higher learning. They usually hold administrative and managerial positions, e.g accounts, lawyers, engineers, medical doctors, teachers, etc. Jobs by this category of workers are popularly referred to as white collar jobs.

Characteristics or Features of Labour

  1. Labour is mobile: This means that labour can be moved from one geographical location to another and from one job to another.
  2. Labour has feelings: labour cannot be used any how as its consent must be sort before it is used in production.
  3. Labour is skillful: Labour becomes skillful through education and training.
  4. Labour requires motivation: For labour to perform efficiently and increase its productivity, it must be motivated in one way or the other.
  5. Labour is a human factor: Labour is a human factor hence it’d supply can easily be controlled.
  6. Labour is not predictable: Labour as a factor of production can not be predicted.
  7. Labour is not fixed: The supply of labour, unlike land, is not fixed as it varies in quantity and quality.
  8. Labour Controls Other Factors of production: Labour controls and combines all other factors of production to make them more meaningful to the society.
  9. Labour has initiative: labour can act on its own initiative.
  10. Labour is perishable: knowledge can diminish overtime as a result of continued unemployment, underemployment, age, and death.

Importance of Labour As A factor of production

Labour is very vital in production due to the following reasons:

  1. Provision of personnel: labour provides the required skills or personnel needed during the process of production.
  2. It influences other factors of production actively: labour plays an active role on other factors of production because without labour, land and capital will remain idle.
  3. Production of goods and services: labour, especially the active working population, provides goods and services needed by the populace, including the aged and the children.
  4. Operation of machines: labour is required in industries to operate machines and carry out the various production processes

C. Capital As a Factor of Production

When it comes to capital, what will usually strike our minds is money just like you are thinking right now. As for me, capital is beyond money. How do I mean? If you have been following my post since we started this topic “production”, you would by now be familiar with the term input. Inputs are the various items and efforts you put into a business to yield the desired result

From that illustration, I can the define Capital as man-made assets or efforts used in production. Your text books may not give you this definition. That’s why you are here to learn new ideas. Dont stick to one man’s opinion about a concept for life. You can visit another the next moment and you get to see a different views. So knowledge is never static but dynamic. So by my definition capital, I simply referred to valuable materials made or possessed by human beings which are used to produce other goods and services. That is, you make use of the valuables you have invested in the past to create or produce further wealth. So you need to effectively combine capital with other factors to produce goods and render services

Examples of these valuables called capital are physical cash (money), cutlass, machines, buildings, motor vehicles, raw materials, semifinished goods, tools and other equipment used in the production of goods and services. Like very other factors of production we have discussed, capital also has its reward which is interest.

Types of capital

The examples of capital I listed earlier falls into different categories called types. Now we will look at each category or types so you would have a clear understanding of what your assets fall when you are going into production. The different categories or types of capital include the following;

  1. Fixed capital: These are assets you don’t use up or finish completely when you are producing goods. By Fixed here, I simply referred to assets as durable. That is, they can last for a very long period of time before experiencing damages or what economist refers to as wear and tear. One more important thing I must tel you is that assets or capital do not change their state or form during time of production. Assets that falls into this kind of capital are land, buildings, tools, motor vehicles, plants, machinery, etc.
  2. Circulatory or working capital: This category of capital is opposite of the first category discussed. These are assets which are used up in the course of production. These consist of capital goods which either change their form or are used up in the course of production. Examples are raw materials, water, fuel, etc.
  3. Current or liquid capital: Current capital are the type of capital that are required for the day-to-day running of productive activities. They can be changed from one form to another.
  4. Social capital: These are capital or assets provided by the government to aid production. Examples are amenities such as roads, electricity, water, telephones, etc. These amenities aid production when are readily available.

Characteristics of Capital

  1. Capital is man-made: Capital in all form is made by man before it can be used for production of goods and services.
  2. Capital is durable: Capital generally are durable assets which can be used for production.
  3. Capital exists in different forms: Capital may be physical like building, motor vehicles, plants and other machinery or liquid cash or money.
  4. Capital is subject to depreciation: Physical assets like motor vehicles, buildings, plant and other machinery.
  5. It ensures large scale production: The existence of enough capital assists firms to embark on large scale production of goods and services.
  6. It promotes division of labour: The availability of enough capital helps to promote the practice of division of labour in !any companies.

Importance of Capital:

  1. Capital facilitates production: Availability of adequate capital to any business outfit helps in mass production of goods and services.
  2. Capital boosts efficiency: Availability of capital to a business enterprise boosts efficiency because more machines are used in production rather than by manual labour.
  3. It assists in location of industry: The availability of social capital like electricity, good roads, water, etc assists to a large extent the location of a particular industry. It also affects the size and nature of the industry to be so located.
  4. It increases standard of living: Acquisition of capital by either individuals or government helps them to have a higher purchasing power, which enables them to have assets and other properties that I’d or promote standard of living.
  5. Production of quality goods: The availability of capital to any firm aids the production of quality goods and services as a result of the purchase of modern machines.

Capital Formation or Accumulation

Capital formation or capital accumulation refers to increasing a country’s stock of real capital. That is, it refers to increasing the net investment in form of fixed assets. Why do I have to touch this? Well its because of what you are about to hit below: “the vicious circle of poverty”

The vicious circle of poverty

I was once taught back then in secondary school that for a country to be able to accumulate more capital, there must be increase in savings and a reduction in consumption of consumer goods. This is because the rate of economic development of any country is directly related to the rate of capital formation. I never understood that expression until now that I could view the world economy and make comparison in terms of a country’s achievement in development. Each time I looked at my country and the western world, I always see a great gap. You will agree with me that most advanced countries like Britain, Japan and the united States of America, stocks of capital are high as a result of high rate of capital formation whereas in many developing countries of the world such as west Africa, there is a low rate of capital accumulation due to low per capital income and low savings, poor investment, which results in what is termed vicious circle of poverty as represented in the illustrative chart below.

The Vicious circle of poverty

Causes of Low Capital Formation in West African Countries

Apart from the fact that i have to point this out, West African countries have been known for ages as one of those experiencing a drastic low rate in capital formation. The causes of low capital formation in west African countries are given below;

  1. Existence of a Vicious circle of poverty: The existence of low income results in low savings and in turn results in a shortage of capital for investment, which results in low investment. Low investment leads to low output, and eventually to low inco!e. The low income results again to low savings and the vicious circle continues.
  2. Wasteful expenditure: Many governments in west African countries are involved in wasteful expenditure as they embark on prestigious but non-productive ventures thereby resulting in low capital formation.
  3. Inequitable distribution of income: In many West African countries, only few individuals are rich while the majority are poor. Even the few rich ones spend their money on prestigious projects which are non-productive ventures and these generally give rise to low capital formation.
  4. Higher propensity to consume: In many West African countries, the propensity to consume by the people is higher than the propensity to save. There is a high fast for imported goods, e.g cars, television, rice, clothing materials, etc. This high propensity to consume results in low savings and investment.
  5. Low savings: Many working class people in West Africa do not have the habit of savings and are usually poor. This may be due to their low earnings, which may not be enough for them to spend not to talk of saving. This usually affects negatively capital formation. The problems of low capital formation can be solved when the above problems are looked into by the various government of West African countries.

Capital Consumption

Meaning: By Capital consumption, I simply refer to the rate at which we use up existing capital stock without replacing worn-out capital goods used in the time of production. When fixed assets like building, motor vehicles, plants and machinery are being used continuously, they undergo wear and tear, hence such assets depreciate in value. It is this wear and tear of these capital goods which reduces their value that is referred to in economics as consumption or depreciation.

During the period of capital consumption, enough savings are not made to maintain its stock of capital, either by making provision for depreciation or her inability to replace worn-out capital or asset, such a country is said to be living on capital or consuming capital and this affects the standard of living of the people negatively.

D. The Entrepreneur As A Factor Of Production

Factors of production need to be effectively coordinated before they can yield outputs. The coordination of these factors requires someone known as the entrepreneur. We can then define An entrepreneur as the factor of production that coordinates and organizes other factors of production (land, labour, and capital) in order to produce goods and services. The entrepreneur bears the risks and takes major decisions of the business. He risks his capital in setting up the business with the aim of obtaining maximum profit. In a clear understanding, the entrepreneur is the person who coordinates, control and organizes the process of production in oder to make maximum output at minimum cost thereby making profits. The reward for entrepreneur is profit.

Characteristics of the Entrepreneur

  1. Risk bearer: Every business has its risk and the person who bears this risk is the entrepreneur. The entrepreneur risks his capital in the course of investment and whatever comes out of it, whether good or bad, he has to take.
  2. Organisation: He organises productive resources for the production of goods and services.
  3. Decision Making: He takes decisions in the course of production, which can bring out better results.
  4. Controls other factors of production: The entrepreneur has absolute control over other factors of production e.g their combinations in order to get maximum production at minimum cost.

Importance of Entrepreneur

  1. Decision making: The entrepreneur takes decisions during production process. He may take decision on what to produce, quantity to produce, what to supply, at what price to sell, etc. Good decision taken will bring out good results.
  2. Provision of capital: The entrepreneur is responsible for the provision of capital for the business. The availability of enough capital will determine the level of success of the business. His capital may include vehicles, building, plants and machinery.
  3. Risk bearing: The entrepreneur bears the risk associated with the business. Lots of risks are involved in all business set up, e.g stealing, bad weather, fire, pandemic etc. When his goods are in high demand, he makes profit but when reverse is the case, he suffer losses. Let’s take the COVID 19 pandemic for instance where the nation and most business enterprises had to shutdown. Most entrepreneur suffered loss due to the fact that there was no one to patronize their business which will eventually lead to shortage.
  4. Efficient management: The entrepreneur also ensures efficient management of the business by combining the other factors of production to maximize production and profit.
  5. Effective Organization: The entrepreneur also ensures an effective organization in the business. He ensures that he has qualified personnel and assigns duties to them. He supervise them to ensure effective operations in the business.

Done studying? See also our previous lesson in Economics;

Take a quick test for this lesson
1. What do you understand by the follow as factors of production?
a. Land
b. Labour
c. Capital
d. Entrepreneur
2. What are the characteristics of each of these factors of production?
3. How are they important in business?
Questions answered correctly? Bravo!!

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