Factors of Production

Factors of Production are any commodity or service used in the production of another goods and service. The primary amongst the factors of production are - Land, Labor and Capital Goods.

Land refers to the natural resources used in the creation of the product, and an economic rent is paid for it, these are generally reproducible. Labor refers to the human effort needed to produce; this is generally compensated in wages. Capital goods are the human-made goods or means of production (including machinery, building and so forth) used in the production of other goods, paid in interest.

These primary factors are ones that do not get transformed by the production process nor do they become a part of the final product, they merely facilitate the process - this could help decide whether one is a primary factor or a secondary one.

Of these primary resources, Capital goods and labor are active factors, while land is a passive one - this distinction is based on the boundary and mobility.

One important decision dilemma that comes across in these primary active factors it the substitution of one for another - Given that Labor operates Capital goods to produce, the manager needs to decide how much labor would be operating on the capital, or how much capital would substitute the labor. This could be expressed in through a ratio - that of labor per unit capital.

Neither too much of labor per unit capital, nor too much capital per unit labor is acceptable. Both could be detrimental to the business, the key lies in the decision making process. This is a real trade off - and would be a decision taking into the long term strategy, government regulation, Unions etc - in short all the factors that might influence the operations of the business. There are no clear answers for this balance; whatever the decision, it has to be with the best interest of the company and all the stakeholders in mind.

Read in kannada: http://somanagement.blogspot.com/2011/02/blog-post_14.html