Factors of production
There are two categories of factors of production: tangible resources including capital, land and natural resources; and non-tangible resources including labor, knowledge and entrepreneurship.
In factor markets the buyer and seller pattern is opposite to the goods markets; in goods markets firms sell and households buy, but in factor markets firms buy and households sell. Households provide the labor; their savings flows into the financial markets and finances physical capital; they own the land and they are the entrepreneurs. The expenditures of the households are financed by the income they earn by selling the factors of production (Gwartney and Skipton, 2015).
Firms weigh the cost versus productivity of acquiring each unit of a factor of production; they expand use of a factor only so long as it is profitable to do so. The factor markets are driven by supply and demand just as any other market. However, there are few differences in the motivation of the sellers and buyers in the factor markets from those in the goods markets, the most obvious of which is the motivation of buyers. In a goods market the buyers want the goods based on utility. Buyers in factor markets do not gain benefit from acquiring a factor of production; it is a means to an end and not the end itself. They gain a benefit only if the factor of production adds to their profit; therefore the demand for a factor of production is a derived demand – it is determined by consumer demand for the final good. When supply for a particular good or service increases, the derived demand for the factors of production needed for producing that good also increases. Derived demand acts a means to strengthen the consumer side of the factors market, a firm is directed to produce goods as per the consumer’s needs and thus gives the power of choice to the customer (Gwartney and Skipton, 2015).
The term land is used in economics to refer to acreage and the natural
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