Factors of production

Examples of Factors of production in the following topics:

• Other Factors of Production

  • There are three factors of production that are required to produce economic output: land, labor, and capital.
  • Factors of production are the inputs to the production process.
  • There are three basic, otherwise known as classical, factors of production:
  • Factors of production (or productive 'inputs' or 'resources') are any commodities or services used to produce goods or services.
  • Money, however, was not considered to be a factor of production in the sense of capital stock since it is not used to directly produce any good.

• The Importance of Factor Prices

  • The prices of different factors of production can help determine which products a country will produce.
  • As a result, the prices of different factors of production can help dictate which products a country will choose to produce.
  • As capital and land the main factors used in the production of grain, the price of grain will also be low, and thus attractive for both local consumption and export.
  • Assuming the cost of relative goods remain constant, if one factor of production becomes more or less expensive, it can cause a significant shift of what is produced in that country.
  • If one factor of production becomes more plentiful, and therefore cheaper, it will cause production of the good that relies on that factor to increase.

• Total Factor Productivity

  • Total factor productivity, which captures how efficiently inputs are utilized, is a key indicator of competitiveness.
  • Increases in total factor productivity reflect a more efficient use of inputs, and total factor productivity is often taken as a measure of long-term technological change or dynamism brought about by such factors as technical innovation.
  • How effectively the factors of production are used is also important.
  • Total output is not only a function of labor and capital, but also of total factor productivity, a measure of efficiency.
  • Discuss the importance of Total Factor Productivity in comparing firms, industries, and countries.

• Short Run Firm Production Decision

  • The short run is the conceptual time period where at least one factor of production is fixed in amount while other factors are variable.
  • The short run is the conceptual time period where at least one factor of production is fixed in amount while other factors are variable in amount.
  • In the short run, a firm could potentially increase output by increasing the amount of the variable factors.
  • An example of a variable factor being increased would be increasing labor through overtime.
  • In economics, a firm will implement a production shutdown when the revenue coming in from the sale of goods cannot cover the variable costs of production.

• Capital and Technology

  • Capital is a factor of production, along with labor and land.
  • Firms may buy, rent, or lease infrastructure and tools in the capital market, but even if the firm owns these factors of production, the opportunity cost of using this capital is the foregone rent that the firm could receive if it rented the capital to somebody else rather than using it for production.
  • A firm decides how much of each factor input to use and how much output to produce based on the market prices for outputs and inputs, as well as exogenous technological determinants represented by the production function.
  • The production function describes the relationship between the quantity of inputs used in production and the quantity of output.
  • The value of marginal product (VMP) of capital is the marginal product of capital multiplied by price.

• Production Possibility Frontier

  • Within a market system, economists use the production possibility frontier (PPF) to graph the combinations of the amounts of two commodities that can be produced using the same amount of each factor of production.
  • Factors that influence economic capacity include technology, an increase in the supply of factors of production, and production interactions such as trade and exchange.
  • When any of these factors are used it allows for an increase in capacity so that the production of neither good has to be sacrificed.
  • PPF graphs help economists study the current state of production as well as possible production scenarios.
  • The output of the economy is impacted by many factors.

• Measuring Productivity

  • While different economic perspectives often identify different factors of production (i.e. inputs in the system), it is useful to identify the following:
  • This will include the derivation of a marginal product for each factor (see ), or essentially the extra output that can be created for each additional unit of input.
  • In this circumstance 'Q' is the quantity of output while each 'x' is a factor input.
  • In the equation, 'Y' is total production while 'L' is labor, 'K' is capital, 'A' is total factor productivity and the alpha and beta are the elasticity of the two inputs.
  • Leontief Production Function: The Leontief Production Function assumes a technologically pre-determined set of proportions for the factors of production (i.e. no ability to substitute between factors.

• Aggregate Production

  • The production function relates the physical outputs of production to the physical inputs or factors of production.
  • To understand how the aggregate production impacts long-run growth, it is important to understand the stages of production :
  • The average product of fixed inputs are still rising.
  • The production function of a firm or economy can be graphed using the total, average, and marginal products.
  • The aggregate production is determined based on the stages of production and the results of the graph.

• Marginal Product of Labor (Physical)

  • The marginal product of labor is the change in output that results from employing an added unit of labor.
  • When production is discrete, we can define the marginal product of labor as ΔY/ΔL where Y is output.
  • When production is continuous, the MPL is the first derivative of the production function in terms of L.
  • gives another example of marginal product of labor.
  • The key factor is that the variable input is being changed while all other factors of production are being held constant.

• Determinants of Supply

  • Some of the more common factors are:
  • Prices of related goods: For purposes of supply analysis, related goods refer to goods from which inputs are derived to be used in the production of the primary good.
  • Conditions of production: The most significant factor here is the state of technology.
  • If there is a technological advancement related to the production of the good, the supply increases.
  • However, some factors unrelated to price can shift the production level.