years. They began by identifying five factors of production that seemed to ource
ID: 347802 • Letter: Y
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years. They began by identifying five factors of production that seemed to ources used to create contribute to wealth (see Figure 1.2): and, labor, capital, neurship, and ge. 1. Land (or natural resources). Land and other natural resources are used to make homes, cars, and other products. Labor (workers). People have always been an important resource in producing goods and services, but many people are norv being replaced 2. by technology 3. Capital. (This includes machines, tools, buildings, or whatever else is used in the production of goods. It may not include money; money is used to buy factors of production but is not alwaye considered a factor by itself.) 4. Entrepreneurship. All the resources in the world have little value unless entrepreneurs are willing to take the risk of starting businesses to use those resources. 5. Knowledge. Information technology has revolutionized business making it possible to quickly determine wants and needs and to respond with desired goods and services. Traditionally, business and economics textbooks emphasized only four fac- tors of production: land, labor, capital, and entrepreneurship. But the late man- agement expert and business consultant Peter Drucker said the most important factor of production in our economy is and always will be knowledge. What do we find when we compare the factors of production in rich and poor countries? Some poor countries have plenty of land and natural resources Russia, for example, has vast areas of land with many resources such as tim- ber and oil, but it is not considered a rich country (yet). Therefore, land isn't the critical element for wealth creation. Most poor countries, such as Mexico, have many laborers, so it's not labor that's the primary source of wealth today. Laborers need to find work to make a contribution; that is, they need entrepreneurs to create jobs for them. Fur- thermore, capital-machinery and tools-is now fairly easy for firms to find in RE 1.2 THE FIVE FACTORS OF PRODUCTIONExplanation / Answer
Land: Land means any natural resources that are used to produce goods and services. It includes not only the surface of the earth but within it and even atmosphere. For example, land includes water, air, light and heat. Even resources that are found under the surface of the earth such as copper, oil, gold, timber, etc. are considered as a part of land. Land resources are considered as the raw materials in the production processes.
Labor: Labor means any human effort done physically or mentally with an aim to earn income and which contributes to the production process. For example, a waiter who serves in a restaurant is a labor, and even an engineer who sets up a building model is also a labor.
Land is immobile as a resource and is passive, whereas labor is flexible, mobile and an active factor of production. Labor is flexible and can be allocated to different parts of economy for maximum output. Labor can be trained by the entrepreneur and can enhance their skills and increase productivity.
Capital: Capital means all the man-made goods such as building, machinery, tools, raw materials that are used in the production process. For example, for a doctor, his capital includes a medical examination room, his stethoscope, etc,
Capital is anything which is produced by humans i.e. man-made and that is further being used in the production process.
Entrepreneur: An Entrepreneur is a person who combines all the above factors of production i.e. land, labor and capital in order to earn profit. An entrepreneur organizes other factors of production and undertakes the risks involved in the production. He is the person who decides what proportion of factors must be combined, what to produce, where to produce and by what method. He decides how the business shall run. He is the boss.
Knowledge: Knowledge is any information or skill that are required and that can be applied to the production of goods and services. Without the knowledge, an entrepreneur would not be able to combine the land, labor and capital and thus all the other four factors of production cannot work efficiently without proper knowledge.
The two factors of production that create wealth for society are Entrepreneurship and knowledge.
For example, Russia has vast resources of land such as timber and oil but there is no productivity, so land alone cannot create wealth for society.
Even Mexico has huge human power, but there is no one who can utilize it, so even labor alone cannot create wealth for society.
Capital alone without land and labor is not useful.
So the combination of Entrepreneurship and Knowledge creates wealth for the society. As entrepreneurs use their knowledge in order to grow business and create wealth.
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