Factors of production

Topics: Economics, Capital, Neoclassical economics Pages: 10 (2287 words) Published: September 15, 2014

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 resources contained therein. Thus coal, oil, metal ores, subterranean water reservoirs, etc. are all examples of land. The payment for land is economic rent, which is considered any payment above that necessary because nature provided the resources without any need for compensation. When property rights are poorly defined or regulations make a resource non-tradable, waste will result because the resource will often be directed toward less valuable uses (Gwartney and Skipton, 2015). The supply of land in nature is essentially perfectly inelastic – independent of the going market price. No matter how expensive land becomes nature will not produce another few thousand acres and the same is true for the minerals and fossil fuels contained within the land. Economic rent serves only an allocative function – the size of the economic rent determines how we use a resource, what purposes we budget or allocate it to, not a production function. The best use of land by any firm depends on various factors associated with it, like the location of the land or the price of a building or a land (Gwartney and Skipton, 2015). Rent control is one of the biggest obstacles in the efficient use of land or buildings. Rent regulation is imposed as limitation on price increases. The nature of rent control is that it begins with, at most, minor effects because it doesn’t bind until the equilibrium rent increases. Thus, the cost of rent control tends to be in the future, and ill effects worsen over time. A candidate who runs on a rent-control platform appeals to a large portion of the voters as there are more renters than landlords. Rent ceilings, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building (Lewis and McAfee, 2013).

Capital and labor
Non-human capital like the physical capital (equipment or...

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