soil, water, air) that can be used in the production process. natural resources) describes all naturally-occurring resources (e.g. The classical factors include land, labor, and capital. The four factors of production describe all the inputs or resources that are used in the production of goods and services. Hence, it can increase production efficiency and act as a factor of production.
The reasoning behind this is that entrepreneurship often leads to innovation, new processes, or new products. EntrepreneurshipĮven though entrepreneurship is not part of the classical factors of production, it is often added to the list as a fourth factor. It is important to note that capital is by definition a derived factor of production since it requires the combination of land and labor (i.e.
The capital stock may include goods such as machinery, tools, vehicles, semi-finished products, etc. CapitalĬapital as a factor of production describes all man-made goods that are used in the production process. Wages are a critical aspect because they are necessary in order to be able to distinguish between labor and leisure activities. The employees receive wages in exchange for their efforts. It includes all physical and mental efforts that are made by employees during the production process. Labor as a factor of production refers to the human effort that is used in the production of goods and services. perfectly inelastic, (2) it is immobile, which means it cannot be moved, and (3) it is passive in nature because it cannot produce anything on its own. Land has three important characteristics: (1) its quantity is fixed, i.e. that can be used in the production process.
It includes all naturally-occurring resources such as soil, water, air, plants, etc. 21.3) This is so because at U the economy will be under-employing its resources and H is beyond the resources available.Land as a factor of production is sometimes also referred to as natural resources. For example, the combined output of the two goods can neither be at U nor H. It is to be remembered that all the points representing the various reduction possibilities must lie on the production possibility curve AF and not inside or outside of it. The production possibility curve is also called transformation curve, because when we move from one position to another, we are really transforming one good into another by shifting resources from one use to another. In this diagram AF is the production possibility curve, also called or the production possibility frontier, which shows the various combinations of the two goods which the economy can produce with a given amount of resources. The following diagram (21.2) illustrates the production possibilities set out in the above table. This is due to the basic fact that the economy’s resources are limited. This means that, in a full-employment economy, more and more of one good can be obtained only by reducing the production of another good.
As we move from A to F, we sacrifice increasing amounts of cotton. At B, the economy can produce 14,000 quintals of wheat and 1000 quintals of cotton.Īt C the production possibilities are 12,000 quintals of wheat and 200u quintals of cotton, as we move from A to F, we give up some units of wheat for some units of cotton For instance, moving from A to B, we sacrifice 1000 quintals of wheat to produce 1000 quintals of cotton, and so on. These are the two extremes represented by A and F and in between them are the situations represented by B, C, D and E. If, on the other hand, all available resources are utilized for the production of cotton, 5000 quintals are produced. It all available resources are employed for the production of wheat, 15,000 quintals of it can be produced. The following table gives the various production possibilities. We suppose that the productive resources are being fully utilized and there is no change in technology. Let us suppose that the economy can produce two commodities, cotton and wheat. If it is decided to produce more of certain goods, the production of certain other goods has to be curtailed. In other words, the economy has to choose which goods to produce and in what quantities. The productive resources of the community can be used for the production of various alternative goods.īut since they are scarce, a choice has to be made between the alternative goods that can be produced. The production possibility curve represents graphically alternative production possibilities open to an economy.
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