The four economic resources that economies use to produce goods and services are land, labour, capital, and entrepreneurial ability. These resources are limited in availability, or scarce, and participants in an economy pay for their use. These payments are called resource payments. 1 Specific types of payments are made for the use of each resource. Resource payments made to the owners of land are called Premiums paid to the contributors of labour are wages and salaries. Interest income, in a strict economic sense, is the resource payment for the use of capital. The resource payment made for the use of entrepreneurial ability is known as profit.
The first category, land, refers to more than just acreage. As a resource, the term land includes the qualities and materials above, on, and below the surface: warm, sunny climates needed for food production, mineral and ore deposits, oil supplies, and even plant and animal life. Some components of the land resource hardly seem scarce. For instance, power derived from the light and heat of the sun seems inexhaustible. Other land resources are renewable: we can replant trees cut down for wood products, clean and recycle water polluted in manufacturing processes, and restock fish taken from our lakes and rivers. Other resources, however, such as minerals, are nonrenewable.
The second scarce resource is labour. Labour includes both mental and physical exertion. When a banker extends a line of credit to a small business, approves an automobile loan, or opens a new account, the bankers actions constitute labour. When a professor gives a lecture or grades an exam, when a carpenter builds a house or a contractor paves a new highway, or when a songwriter writes a song and a singer sings it all of these events are included in the calculation of labour. The only activity commonly considered labour that economists exclude from their definition is the managerial function of a business. Management is usually considered part of the entrepreneurial resource.
The third scarce resource is capital. Economists use this term in a different fashion from bankers. By capital, economists do not mean money, but the goods and services used to produce articles of consumption. When economists discuss capital goods, they mean products such as tools or machinery, and delivery channels such as bridges or roads products that are used to generate other products or facilitate consumption. The premium paid to the owner of capital goods is called interest income. You should be careful not to confuse the economic meaning of this term with the banking definition of interest income as a return for certain types of deposits at assigned maturities.
The fourth factor of production is entrepreneurial ability. Some authors include entrepreneurial ability in the labour category. However, the entrepreneurial function in business is so important that it deserves separate study. Of the four scarce resources, entrepreneurial skill may be the most important. Entrepreneurial ability is the driving force behind all business ventures. The entrepreneur must identify a need and seek an opportunity to fill it. The entrepreneur must obtain and combine the other factors of production in a way that produces a good or service. The entrepreneur must market and sell this product or service to the consumer. Above all, the entrepreneur must risk money, time, and reputation on the success of his or her venture.
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Text 7. PRODUCTION
The economy is employing its resources to produce goods and services. That is why these resources land, capital, labour, and entrepreneurial ability are called the factors of production.
/There are several ways to define production. One definition is that it is any activity that creates present or future utility. Production may be equivalently described as a process that transforms inputs (factors of production) into outputs. The two descriptions are equivalent because output is something that creates present or future utility. Among the inputs into production, economists have traditionally included land, labour, capital, and the more elusive category called entrepreneurship. Entrepreneurship is defined as the process of organizing, managing, and assuming responsibility for a business enterprise. An entrepreneur is thus, by definition, a risk-taker.
To the above list (land, labour, capital, and entrepreneurship), it has become increasingly common to add such factors as knowledge or technology, organization, and energy.
A production function is the relationship by which inputs are combined to produce output. Schematically, it may be represented as a box. Inputs are fed into it, and output is discharged from it.
A production function may also be thought of as a cooking recipe. It lists the ingredients and tells you, say, how many pancakes you will get if you manipulate the ingredients in a certain wayj In some recipes, the ingredients must be mixed in fixed proportions. Other recipes allow substitution between the ingredients, as in a pancake recipe that allows milk and oil to be substituted for eggs. Production functions can be of either of these two types.
