4 factors of production law12/28/2023 In order to remain competitive, businesses place a premium on employees who bring these “soft skills” to the table. Intellectual contributions include experience in and out of school, training, skills, and natural abilities. This broader definition of labor is particularly important in today's technology-driven business environment, which has come to rely much more on the intellectual contributions of the labor force than the physical labor required of, say, working in a production line. The word labor often calls to mind physical labor-working in a factory or field, constructing a building, waiting tables in a restaurant-but it can refer to any human input (paid or unpaid) involved in the production of a good or service. You may possess certain human resources already-perhaps you have an athletic gift that enables you to play professional ball to earn a living, for example-but you can also develop them through job training, education, experience, and so on. You’re adding to your own human resources right now by learning. Labor Labor refers to human resources (also called human capital)-physical or intellectual. Resources that are cultivated or made with human effort can't be considered natural resources, which is why crops aren't natural resources. It's also possible to invent new uses for natural resources (using wind to generate electricity, for example). These natural resources can be renewable, such as forests, or nonrenewable, such as oil or natural gas. New natural resources-or new ways of extracting them (such as fracking, for example)-can be discovered, though. Examples of natural resources are land, trees, wind, water, and minerals.Ī key feature of natural resources is that people can't make them. In order to provide benefit, people first have to discover them and then figure out how to use them in the the production of a good or service. Natural Resources Natural resources have two fundamental characteristics: (1) They are found in nature, and (2) they can be used for the production of goods and services. Capital (machinery, factories, equipment).Question: Production function is a _.Īns: The correct option is A. Thus, it can be said that ‘returns to a factor’ is a short run phenomenon. It explains what happens to the output when the variable factor changes, keeping the fixed factors constant. Question: What is meant by returns to a factor?Īnswer: Returns to a factor is used to explain the short run production function. It measures by how much proportion the output changes when inputs are changed proportionately. The law that is used to explain this is called the law of returns to scale. Here, all factors are varied in the same proportion. The long-run production function is different in concept from the short run production function. Now, if the firm chooses to employ 2 units of labour, then the land-labour ratio becomes 3:1 (6:2). The law of returns to a factor explains such a production function.įor example, consider that a firm has 20 units of labour and 6 acres of land and it initially uses one unit of labour only (variable factor) on its land (fixed factor). The short-run production function defines the relationship between one variable factor (keeping all other factors fixed) and the output. Fixed factors do not exist in the long run.Ĭonsequently, we can define two production functions: short-run and long-run. These factors are normally characteristic of the short run or short period of time only. On the other hand, those factors that cannot be varied or changed as the output changes are called fixed factors. Examples of variable factors include daily- wage labour, raw materials, etc. Variable factors exist in both, the short run and the long run. These are the factors that can be changed. Those inputs that vary directly with the output are called variable factors. The distinction is based on the nature of factor inputs. This distinction is extremely relevant in microeconomics. The production function is differently defined in the short run and in the long run. Note that there may be many other factors as well but we have assumed two-factor inputs here. Here, ‘Q’ represents the output, whereas ‘L’ and ‘K’ are the inputs, representing labour and capital (such as machinery) respectively. Mathematically, we may write this as follows: It assumed inputs as the explanatory or independent variable and output as the dependent variable. The functional relationship between physical inputs (or factors of production) and output is called production function.
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