Factor of production
| Factor of production |
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| See also |
Factor of production (also called expenditure) is any kind of goods or services used in the production process.
Production factors are: work done by the employee, car park, manager's wage, electricity, Internet etc.
Classification
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.
References
- Florian, M., Lenstra, J. K., & Rinnooy Kan, A. H. G. (1980). Deterministic production planning: Algorithms and complexity. Management science, 26(7), 669-679.
