What Do the Factors of Production Mean?
Any form of physical or mental exertion is referred to as labor. Labor is defined as the efforts made to generate any products or services in economic terms. It encompasses all forms of human activities – physical exertion, mental activity, intellectual use, and so on – that are performed in exchange for monetary benefit.
In economics, factors of production are the resources and inputs that are used in the process of production to produce an output, finished goods, or services. The three basic factors of production are given below.
Land
Labor
Capital
Entrepreneurship
In this section, we shall learn about labor, the major factor of production.
What Does the Term Labor Mean?
In terms of Economics, the term labor refers to the efforts exerted by humans to produce the final goods and services. So, you must be wondering what is meant by labor as a factor of production? It is simply all types of human efforts, including physical, mental, knowledgeable, and intellectual that are exerted, to get an economic reward. Therefore, it can be defined as the physical or mental effort by a human in the process of production. It comes under the category of primary factors of production.
Now, we shall discuss in detail the features of labor as a factor of production.
Characteristics of Labor as a Factor of Production
Unlike other factors of production, labor pertains to living beings. To explain the true meaning of labor as a factor of production, you must be well aware of all the characteristics of the same. Some important features of labor as a factor of production are discussed below.
Perishable in Nature
The term perishable means something that cannot be stored or saved for long, as we know that labor is the flow of service of a laborer. It cannot be stored, which means that if a worker skips one day of his work, he cannot utilize this labor the next day. A day without work cannot be revived. Hence, labor is considered as highly perishable. In nature, labor is perishable. This simply implies that it must have sufficient storage capacity, as labor cannot be stored. If a worker fails to show up for a shift, his or her labor for that shift is fully lost. It is not possible to preserve it and use it the next day. That labor is irreversibly lost. A laborer cannot save his or her work for later use. As a result, we might conclude that labor is a very perishable input of production.
Labor Stands for Human Efforts
Unlike other factors of production, labor is directly related to human efforts, including both physical and mental efforts by a person. When a person works for hours intending to produce the final product or goods or services, he also needs to rest. This implies that the laborer's actual presence is required. To offer his services, the laborer must be physically present at the location where the goods or services are produced. He and his labor-power are inextricably linked. As a result, we cannot expect a welder to work from home; he must be present at the job site. Hence, it proves that labor is human effort. Some significant factors of labor are as follows.
Fair/good treatment of workers.
Providing a suitable and comfortable environment for workers.
Workers must not be forced to work extra time at low prices.
As a worker, the person must be honest and hardworking.
Labor Cannot be Separated from a Laborer
To use labor, the physical presence of a laborer is essential. Labor is simply the services provided by a person. So, the person selling the services must be present at the site of production during the time of production. For example, a welder or a builder can not work from home. To carry out the process of construction, he must be physically as well as mentally present at the site. Therefore, one can say that labor-power exists only as long as the laborer exists. In comparison to other factors of production, labor is distinctive. Unlike the others, it is directly tied to human labor. As a result, when it comes to labor, some unique considerations must be made. Fair treatment of employees, relaxation periods, a proper work atmosphere, idle time, and so on are only a few examples.
Labor is Heterogeneous in Nature
This statement means that every labor is unique in his own way. Each individual possesses different qualities and abilities that he or she can use at the workplace. Everybody may have different qualities, hence, must never be the prey to any comparison. We can't expect labor to be evenly distributed. Every laborer is different, so his labor-power will be different as well. The quality and efficiency of labor will be determined by the laborer's talents, work environment, incentives, and other inherent qualities.The quality of work may differ depending upon the following factors.
Work environment provided to the person.
Skills that an individual possesses.
Perks or incentives offered to the person.
Inherent qualities of individuals.
Low Bargaining Power
Labor doesn’t have a standard price. Many times, due to lack of employment, illiteracy, and other factors laborers are forced to work at relatively lower prices for the sake of their livelihood. Their skills and work cannot be stored for later utilization. People usually take advantage of a laborer’s unfortunate situation and poor living conditions and make them work on lower wages. When compared with the services of an employee, a laborer has very low bargaining power. The need for money to live compels them to accept the low wages that they are offered. The buyer of services has very little bargaining power with labor as a factor of production. It can't be kept, isn't particularly movable, and doesn't have a set price or reserve price. As a result, most laborers are forced to accept whatever pay the employer gives. Laborers have very low bargaining power in comparison to the employer.
Not Easily Mobile in Nature
Now you must be wondering, why cannot a labor move to the site of production for work? A laborer in need of money and searching for work can surely relocate to the site of production. However, many factors including, the family’s responsibility, traveling expenses, and the unsafe environment makes the situation difficult for him. Whereas, if we talk about other factors of production, such as goods and raw materials, these can easily be transported from one place to another. Therefore, in comparison labor is less mobile than other factors of production. Labor is a movable factor of production, meaning that laborers can relocate to the job site. However, there are numerous impediments to labor mobility from one location to another. As a result, we might claim that labor is less mobile than other components of production such as capital.
Inelastic Supply
Let us understand this with an example. Suppose, during the construction of a cinema hall in a metropolitan city, there is a shortage of skilled laborers. So, in such a case, his work might get delayed, but the skilled laborers cannot be generated suddenly. Even the movement of labor from another place for the construction of that particular cinema hall will take considerable time, effort, and relatively higher expenses. Thus, it is correct to say that supply of labor in a market is inelastic as it cannot be increased suddenly with the increase in demand.
Efficiency can be Increased
If any person is given adequate education, his efficiency to work or to provide labor can be raised. Proper guidance, learning opportunities, and experiences play a vital role in the process of increasing the efficiency of a laborer.
Decision Power
Unlike capital, land, other primary and secondary factors of production, labor can make rational decisions regarding his or her job. Hence, labor possesses decision making power.
FAQs on Labour as a Factor of Production
1. What is meant by factors of Production?
Factors of production are majorly considered as the building blocks of an economy. The inputs needed to produce goods and services fall under the concept of factors of production. The four major factors of production are:
Land
Labour
Capital
Entrepreneurship
2. Why is labour called an active factor of Production?
As discussed above, labour is the living factor of production. It is the only factor that can work and start the production of goods and services itself. Labour uses land and capital for production. However, neither land nor the capital can itself begin production of goods to produce the final product. Therefore, labour works as an active factor of production used for producing the final product.
3. Why is the efficiency rate of labour being relatively lower in a populated country like India?
Many factors have lowered the efficiency of labour in India. Despite being a populated country, the efficiency of labour stays low due to the below-mentioned factors.
Hot climatic conditions.
Low wages are offered to the labourers.
Inadequate availability of machinery required for production.
Lack of availability of raw material.
Lack of available resources required for production.
Lack of education and training.
Low literacy rate.
4. What are the factors of production and examples?
The factors of production are a key economic term that describes the components required to create a product or service for sale. Land, labor, capital, and entrepreneurship are the four elements that are typically broken down. Commentators, on the other hand, frequently refer to labor and capital as the two basic components of production. The land is physical land, such as hectares, used in the blocks where farms and buildings are built. All wage-earning activities, such as professional jobs, retail work, and so on, are classified as labor. Entrepreneurship refers to the initiatives taken by business owners, who often start as the first employees in their companies and then gradually add more elements of production to expand their operations. Finally, capital refers to the funds, equipment, and other assets required to start or expand a company.
5. What is ownership of factors of production?
In economic systems, the ownership of factors of production is assumed to be with families, who lend or lease them to entrepreneurs and organizations. Except for labor, ownership of factors of production depends on the branch office and economic system.
A real estate organization, for example, often owns large blocks of property, whereas retail corporations and shops typically lease land for long periods. Capital can also be owned or rented from another party, following a similar process. Labor, on the other hand, is never owned by businesses. Wages are the basis of labor's dealings with businesses.
Ownership of production components varies depending on the economic system. In capitalism, for example, private businesses and people hold the majority of the production factors. In socialism, however, the collective good is the guiding premise. As a result, under socialism, sources of production such as land and capital are owned and managed by the entire society.
6. What is the importance of factors of production?
In the current economic analysis, the concept of the factor of production is extremely important. When a corporation runs under increasing or reducing expenses in the short run, and when returns to scale increase or decrease in the long run, it is employed in the theory of production in which diverse combinations of elements of production contribute to producing output.
The cost of production theory is also influenced by the combinations of factors used in business and the prices paid to them. Elements of production are classified as fixed factors or variable factors according to the theory of production costs. Fixed factors, such as machinery and tube wells, have expenses that do not change when output changes.
The quantities and costs of variable elements change as the output changes. Larger outputs necessitate more labor, raw materials, power, and other resources.
Even if the company cannot cover the production cost of the rental element and suffers a loss, the company will continue to produce as long as it covers the production cost of the variable element used. However, this can only be done in the short term.
