Factor of production
In the classic economic approach we can distinguish the basic factors of production, such as:
- labor - human effort that is put in the production of goods or services
- capital - good previously produced, resources, machinery, buildings, infrastructure, knowledge and experience
- ground - good of natural origin held by the owner, for example: land, minerals, goods of natural origin
Factors of production impact on management
On the basis of the available factors of production and prices, the company can determine best production technology at given moment. Technology that uses the most capital is called a capital intensive, while technology demanding large number of humans work is labor-intensive.
Along with the changes in prices of the factors of production the company uses substitution effect to selects the relevant quantities of the factors of production to minimize overall costs.
Factors of production can also be divided into fixed and variable.
- Fixed factor of production - may not be changed in short term.
- Variable factor of production - quantity can be changed even in the short term.
Fixed and variable factors of production
Fixed factors of production refer to resources that cannot be easily increased or decreased in the short term. These include resources such as land, buildings, and equipment. For example, a company may have a factory or office building that it cannot quickly expand or reduce in size. These resources are considered to be fixed because they are difficult to change in the short-term and require a significant amount of time and money to alter.
Variable factors of production, on the other hand, refer to resources that can be easily increased or decreased in the short term. These include resources such as labor and raw materials. A company can quickly adjust the number of workers it employs or the amount of raw materials it uses to produce its goods or services. These resources are considered variable because they can be easily changed in the short-term to respond to changes in demand.
In a business setting, management will often try to minimize the costs of fixed factors of production while maximizing the use of variable factors of production. This is because fixed factors of production tend to have high sunk costs that cannot be recovered, while variable factors of production can be adjusted to respond to changes in demand.
Examples of factors of production
- Labor: This is the most important factor of production, and can include manual labor, such as a bricklayer laying brick, or white-collar labor, such as an accountant preparing financial statements.
- Capital: This factor of production includes the resources used in the production process, such as buildings, machinery, tools, vehicles, and inventory.
- Land: This factor of production includes land and natural resources, such as soil, timber, minerals, and water.
- Entrepreneurship: This factor of production includes the effort and risk-taking of entrepreneurs who organize and manage businesses.
- Technology: This factor of production includes the knowledge and tools used to create and develop products. Examples include computers, software, machine tools, and production systems.
Advantages of proper factor of production configuration
Factor of production can provide significant advantages in the production process. These include:
- Increased efficiency: By using the right factors of production, businesses can reduce costs and increase productivity. This is especially important in today's highly competitive environment.
- Improved quality: By using high-quality factors of production, businesses can create better products that are more likely to meet customer needs and preferences.
- Reduced risk: By using the right factors of production, businesses can reduce the chances of product failure and minimize the risk of losses.
- Increased profits: By using the right factors of production, businesses can increase their profits and become more competitive in the market.
Limitations of Factor of production
Factor of production can be a great tool to increase productivity and efficiency, however, it has its limitations. These include:
- Limited availability of resources - The availability of resources used in production is often limited, meaning that they can be difficult to obtain in sufficient quantities. This can limit the amount of production that can be achieved.
- Cost of production - The cost of production can be prohibitive, especially as the complexity of the production process increases. This can limit the number of products that can be produced.
- Time - The amount of time required to produce a product can be considerable, and this can limit the rate of production.
- Quality - The quality of the products produced can be compromised due to the use of poor quality materials or processes.
- Variability - The production process can be unpredictable, meaning that it can be difficult to produce a consistent quality product.
- Environmental impacts - The production process can have a negative impact on the environment, such as pollution or depletion of resources.
These approaches focus on the various inputs used to produce goods and services and how they interact. The following are some of the approaches related to Factor of production:
- The neoclassical theory of production, which states that the amount of output depends on the number and quality of inputs used and the level of technology.
- The Austrian theory of production, which states that the combination of inputs used will determine the level of output.
- The Marxist theory of production, which states that the production process is determined by the ownership of the means of production.
- The institutional theory of production, which states that the production process is influenced by the legal and political environment.
- The behavioral theory of production, which states that the production process is determined by organizational behavior and human behavior.
In summary, other approaches related to Factor of production include the neoclassical, Austrian, Marxist, institutional, and behavioral theories of production. These approaches focus on the various inputs used to produce goods and services and how they interact.
|Factor of production — recommended articles
|Production reserve — Capital resource — Designed quality — Resources and capabilities — Overproduction — Determining the length of the production cycle — Knowledge capital — Life cycle of technology — Availability of resources
- Florian, M., Lenstra, J. K., & Rinnooy Kan, A. H. G. (1980). Deterministic production planning: Algorithms and complexity. Management science, 26(7), 669-679.