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Text 4.1

The Three Classical Factors of Production

All else passes away, the land only remains.” – An ancient saying.

(1) Introduction.Things we have to work with in order to achieve our goals are referred to as resources. When resources are used in the production of goods and services they are called inputs into production, orfactors of production.

There are thousands of dif­ferent kinds of factors of production – everything from the electricity that runs the machines to the paper that packages the products. They can be classified in many ways. The three basic categories of productive factors – “the classical triad” – included in most classifications are: land, labour, and capital.

The fourth factor of production often included in such classifications is entrepreneurship. Technology is sometimes identified as a factor of production too, but it can be argued that technology forms part of capital and labour.

Similarly, all resources can be grouped into those that are natural (land), manufactured (capital), and human (labour).

(2) Land.In economics, land is defined as everything in the universe that is not created by human beings. It includes more than the mere extension, – that is the solid surface of the earth. Air, sunlight, forests, soil, the “contents of the earth” – water and minerals – are all classified as land, as are all manner of natural forces or opportunities – the “gifts of nature” – that are not created by people.

Most of the land in the world is scarce. It has economic value and is owned by somebody – individuals, businesses, other organizations, or governments. The price paid for the use of land (that is, the income received by the owner of the land) is called rent.

It should be noted that natural resources fall into two large groups: renewableor, otherwise, living resources that can reproduce themselves – such as fish or trees; and exhaustibleornonliving resources that do not reproduce themselves – e.g. metal ores, oil, or coal,whose rate of usemust be most carefully considered.We can affect that rate by conservation (use less), or by reusing (recycling or reclaiming) a particular product or material.

(3) Labour. To make the gifts of nature satisfy our needs and desires, human beings must do something with the natural resources; they must exert themselves, and this human exertion in production is called labour. Everything that people do to convert natural opportunities into human satisfactions – whether it involves the exertion of brawn, or brains, or both – is labour, to the economist. Most simply put, labour is the productive resource consisting of the physical or mental work that people do in producing goods and services.

Wages are the payments people receive when they sell their time and efforts (labour) for a price. The wage rate is “the price of a unit of labour”. There are many different kinds of labour. Some labour is unpleasant, some is not. Some kinds are highly valued and sell for high prices; others are not valued so highly and sell for a much lower price (wage rate).

(4) Capital. When the stuff of nature is worked up by labour into tangible goods, which satisfy human desires and have exchange value, we call those goods wealth. When some of the wealth is used to produce more wealth, economists refer to it as capital.

Capital’s primary role in the economy is to improve the productivity of labour as it transforms the natural resources of land into wants-and-needs-satisfying goods. Capital makes labour more productive: workers use tools and machinery to increase their output. Without capital all production would be done by hand.

Capital can be thought of as falling into two broad forms. Capital goods – i.e. real or physical capital – are tangible items such as buildings, machinery, and equipment produced and used in the production of other goods and services. Money or financial capital is a fluid, intangible form of capital used for investment. Money capital is raised by selling stocks and bonds in order to finance the acquisition of real capital or capital goods.

Since capital goods are not themselves consumable items, they are contrasted with consumer goods, which are bought for personal or household final use. In this sense, capital goods can be considered a form of deferred consumption, or future goods, or goods of “higher-order”. Producing more capital goods and fewer consumption goods is the basic act of investment and the primary means of achieving economic growth.

Capital may also be classed as specialized, such as railway equipment, or unspecialized, such as lumber or other raw materials having many uses.

Capital can also be private or social. Private capital is usually owned by individuals and private business organizations. Social capital is usually owned by the state and is the infrastructure of the economy, such as roads, bridges, schools, and hospitals.

The income earned by capital is interest, the counterpart to the wages and rent earned by the other factors of production.*


*Important note: It should be noted that “capital” is an extremely vague term whose meaning largely depends on the context in which it is used. Thus, in classical economic theory, capital does not refer to the business sense of financial capital, i.e. money. Rather, it is short-hand for real capital, physical capital, and capital goods – the terms that are used almost synonymously in traditional economic analysis. They all refer to the stock of already/previously-produced durable goods that are used as a means of production to manufacture or produce other goods – now and in the future.

In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. Land is often referred to as “capital” too, in the sense that one can buy land and use it as a “capital investment”, while a combination of land and capital as we have defined them here is often referred to as “real estate”.

In business, a distinction is normally made between fixed capital and working capital. Fixed capital is durable, examples being factories, offices, equipment, machinery, new technology and so on. Working capital (or inventories) is circulating capital that is used up quickly in the production process such as raw materials, stocks of finished and semi-finished goods that will be economically consumed in the near future or will be made into a finished consumer good in the near future.



Text 4.2


“Nothing venture, nothing have.”

“No pains, no gains.”– English proverbs

(1) What is entrepreneurship? Entrepreneurship (or, otherwise, “entrepreneurial ability”,“enterprise”, “individual capital”, “management”, or just “leadership”) refers to the unique talent that some people have for organizing inputs into the production of goods and services. The success and/or failure of a business often depends on the quality of entrepreneurship.

Some economists mention entrepreneurship as a fourth factor of production. However, this seems to be a specialist form of labour or “human capital”. When differentiated, the payment for this factor of production is called profit.

(2) What is the entrepreneur? The entrepreneur is a far-sighted resource-manager who brings together the other three factors of production, gets them organized, and directs them into socially desired production, while taking at that risks with his/her money and the financial capital of others who are willing to share the risks, since uncertainty is everywhere.

Put most simply, the entrepreneur is the one who decides what to produce and how much, which inputs to use, and all that; who hires and pays the owners of the labour, land, and capital. The entrepreneurs hope that if they produce the right amounts of the right things and do it efficiently, they will make a profit. If they don’t, they won’t. They will lose. Their loss is their “punish­ment” for using society’s resources in ways the society didn’t want its resources to be used.

(3)What the entrepreneur is not.Many economic texts suggest that entrepreneurs innovate, introduce new or improved products and technologies, but this is not generally true. Most entrepreneurs just copy other businesses or ways of production.

In addition, contrary to popular belief, entrepreneurs aren’t generally high-risk takers when they can’t affect the outcome of the situation. They tend to set realistic and achievable goals, and when they do take risks, they’re usually calculated ones based on facts and experience, rather than instincts.

Entrepreneurs are participants, not observers; players, not fans. More often than not, they are driven not by the need to make money, but by the need to make their dreams a reality, and money is a byproduct of an entrepreneur’s motivation rather than the motivation itself.

(4) The entrepreneur’s role in the market economy. Entrepreneurs occupy a central position in any market economy, stimulating all economic activity. The most dynamic societies in the world are the ones that have the most entrepreneurs, plus the economic and legal structure to encourage and motivate entrepreneurs to greater activities.

It’s entrepreneurial energy, creativity and motivation that trigger the production and sale of new products and services. It's the entrepreneur who seeks opportunities to profit by satisfying as yet unsatisfied needs. It’s the entrepreneur who seeks disequilibrium – a gap between the wants and needs of the customers and the products and services that are currently available – and finds a way to fill that gap.

Because entrepreneurs create all wealth, all jobs, all opportunities and all prosperity in the nation, they are the most important people in a market economy – and there are never enough of them. Are you ready to join their ranks/forces?

(5) What does it take to become an entrepreneur? Just who is an entrepreneur? What are the requirements for being a successful entrepreneur? While there’s no single entrepreneurial archetype, certain common traits indicate an entrepreneurial personality. First of all, there’s a great deal of truth to the notion that entrepreneurs are born, not made. Although our upbringings, belief systems, education, training and development affect our ultimate behaviours, our core personalities remain relatively constant throughout our lives – that is, the entrepreneurial adult first often appears as an entrepreneurial child.

Next, most entrepreneurs who reach their goals are often natural leaders and have a natural instinct for choosing the best way of doing their businesses. They are strong problem-solvers, and they work well under pressure. They are willing to risk their resources in the pursuit of profit. They are persistent and determined to succeed, because their own money and ego are at risk. They continually seek ways to offer their products and services in such a way that they’re more attractive than anything else available. They are fast moving and flexible, willing to change quickly when they get new information.

And finally, to be an entrepreneur is to be future-oriented and to be an optimist, to believe that success is possible and with the right amount of time and money, and a bit of luck, you can do anything to make your dream come true.



Date: 2015-12-24; view: 856

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