TOPIC 2: Factors of Production

Production
It is the transformation of raw materials into finished goods and distribution of goods and services
to the final consumer. The transformation is necessary so as to meet human wants. Basically,
production in economics is when material is transformed into semi-finished or finished goods.
Production can be seen as the creation of utility. Utility is the ability of any commodity to satisfy
human wants. Production itself aids in satisfying human wants. Production is not only about the
goods but also rendering of services.
The process of production does not complete until it gets to the final consumers. Production
process is about manufacturing, packaging, transporting, advertising, marketing, etc.
Types of goods
There are basically two types of goods; consumer and capital goods.
Consumer goods: they are referring to as finished products. They are those goods that satisfy
consumers’ immediate wants and desires, e.g., television, milk, etc.
Capital goods: these are goods that are in further production of other goods like semi-finished
goods, e.g., machines, etc
Stages of production
Primary stage: production starts from this stage. They are those raw materials that are extracted
from the earth either from the land, e.g., coal or from the sea, e.g., fish.
Secondary stage: this stage involves the transformation of the extracted raw materials into semi-
finished or intermediary goods, e.g., those in the manufacturing, fabrication, sawmilling,
construction of roads, bridges, etc.
Tertiary stage: at this point, services are rendered to meet the wants or needs of the consumers,
e.g., comedians, drivers, nurses, etc.
Factors of Production
These refer to as economic resources, and basically, they are in two categories:
➢ Property resources: land and capital.
➢ Human resources: labour and entrepreneurial ability.

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Land
It includes all natural resources used for the production of goods and services, e.g., earth, mineral
deposits, valley, mountain, etc.
Characteristics of land include:
1. Gift of nature: land has being in existence before man was created. In other words, land
was not created by any man.
2. Limited in supply: the available space cannot be increase; it is fixed in supply. An acre of
land cannot suddenly increase to 2 acres of land.
3. It is immobile: land cannot be moved from one area to another area.
4. Variability in the quality: the value or quality of land varies. This is the reason for some
areas with good soil that can be used for planting, while some are for making glass, etc.
5. Law of diminishing returns: land is subject to law of diminishing returns. At a certain
point, employing an additional factor of production causes relatively smaller increase in
output.
6. Derive demand: land is a derive demand (indirect demand). Derived demand occurs as an
input to a production process.
7. Rent: reward for land is called rent, and the charge is known as rent-age.
Law of diminishing returns
The law states that when there is a continuous application of a variable factor on a given fixed
factor, the result/effect is a decline in total product. In other words, as more and more of a
variable factor is added to a fixed factor, the total product will increase up to a certain point,
then it will start to decrease at a particular point.
Fixed (land/capital) Variable (labour) Total output Average output Marginal output
2 1 10 10 -
2 2 30 15 20
2 3 60 20 30
2 4 100 25 40
2 5 130 26 30
2 6 150 25 20
2 7 161 23 11

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Total output: the number of labour used on 2 plots of land/capital will yield total output, i.e.,
combination of land/capital and labour will give us total output. Total output represents all goods
and services produced with a given productive resources. They are the factors of production that
are combined together that yield the output needed for consumption.
Average output: it is the units per output, i.e., the units of output that each person (labour)
contributes.
Average output = Total output
Variable factor
Marginal output: measure the change in output as an extra unit of a variable factor (labour) is
added or combined for production, i.e., changes in the level of outputs (total output). Law of
diminishing returns reveals itself through marginal output.
Basically, there are three types of returns; increasing, constant and decreasing returns
Increasing returns: this implies that additional input will bring about a greater change in output.
Constant returns: additional input gives exactly the same change in output.
Decreasing returns: additional input yields lesser change in production.
Labour
It is the physical and mental effort of people used in production of goods and services. There are
three types of labour; skilled, semi-skilled and unskilled labour.
Skilled labour: this includes making use of greater % input of mental efforts in production
processes and it involves a length of training which is highly formal. They are regarded as
professional and specialist, e.g., lecturers, bankers, lawyers, etc.
Semi-skilled labour: they require a short period of training and uses both physical and mental
efforts. The training could be formal or informal, or it could be both formal and informal, e.g.,
drivers, tailors, clerks, etc.
Unskilled labour: this includes people with little or no training. It involves greater % of physical
than mental efforts used in production, e.g., cleaners, night guards, etc.
Characteristics of labour include:
1. It is human; they are made by GOD and they are not man-made.
2. Labour is mobile; it is convenient for labour to move from one place to another.
3. Labour cannot be stored; if skill is left unused, one may lose it.

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 4. Labour is not fixed; the quantity and quality of production can be increased by employing
more labour.
5. Wage is the reward for labour.
Division of labour
The concept is originated by Adam Smith (1778). Adam Smith observed how pin was being
produced. In his observation, he found out that making a pin needed 18 stages; each pin maker
will make 20 pins in a day. He then introduced that each stage should be handled by one person
each. At the end of the day, it was discovered that 48,000 pins were produced by 10 men. Division
of labour gave birth to what is called specialization.
Division of labour is defined as the breaking down of production processes into various stages, so
that each stage is undertaken by a person or group of persons. The major aim of division of labour
is specifically to increase the level of output.
Advantages of division of labour
1. Increase productivity: the greatest advantage of division of labour is that it increases
immensely the productivity per worker. Example is Adam Smith pin making process.
2. Saving of time: as worker remains employed on the same process, time is not wasted in
moving from one process to another. With division of labour, hours used for production is
highly minimized, i.e., more goods will be produced with lesser hours.
3. Quality of work: division of labour enhances quality. The worker becomes highly skilled
because of the repeated performance of the same operation. When one engages on a
particular work continuously, improvement will set in.
4. Increase the use of machines: by breaking up the production of a commodity into small
and simple operations, division of labour encourages the use of machinery. Machines can
be economically used only when they are fully used, that is, when their productive capacity
is fully utilized.
5. Increases the employment of specialists: more qualified or competent staff will be
employed.
6. Inventions are facilitated: it promotes the development of new ideas and better techniques
of doing the work.

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Disadvantages of division of labour
1. Boredom: repetition creates boredom and monotony. Doing the same work over and over
again without any change produces mental fatigue.
2. Decline in craftsmanship: the worker deteriorates in the technical skill, instead of making
the whole article; he is required to repeat a new simple movement. The skill gradually dies
out.
3. Immobility of labour: the worker is doing only a part of the job. He knows only that much
and no more. Leaving for another place may not be easy for him because he may not find
exactly the same job elsewhere, if he desires a change.
4. Greater interdependent: division of labour brings about interdependence in production.
If one group of workers goes on strikes, it brings the whole production process to a halt.
5. Greater risks of unemployment: breaking down production process into different tasks
makes it easier to replace humans with machines and this leads to structural unemployment.
Also if the worker is dismissed, he may have to search for the same job which he’s
specialized. His chance of securing another job of his specialization is very slim.
Limitation of division of labour
1. Size of the market: if the size of the market is small, it affects the division of labour. For
example, it will look foolish for shoemaker to employ half a dozen on the making of a pair
of shoe.
2. Size of capital: this will determine if workers are to be employed or not, which may not
need division of labour.
3. Nature of the goods: some goods and services are suitable for large scale production while
others cannot be produced on large scale.
4. Availability of skilled labour: the number of skilled worker will determine the way in
which production process has to be divided.
5. Technical difficulty: breakings down of works into different stages become a very
difficult thing if the machine used for production is faulty.

Capital

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It is defined as all non-natural (manufactured) resources that are used in the creation and
production of other products. It is a man-made wealth reserved for production of further wealth.
E.g., stocks, cash, building, machineries, etc. the reward for capital is interest.
Types of capital
Fixed capital: this is the form of capital whose form remains unchanged in the process of
production. They are all durable assets, e.g., machine, building, etc. the renewal periods are always
long.
Circulating capital: the form changes in the process of production. That means they are constantly
being replaced. It changes as output changes. Renewal periods are very short, e.g., raw materials,
cash, stationery, etc.
Working capital: they are finished goods and services. They are easily converted into cash within
a short period of time.
Social capital: this is in form of capital collectively owned by the society, e.g., roads, government
schools, etc.
Entrepreneur
The entrepreneur is the coordinator of other factors of production, i.e., land, labour and capital.
They are the one that controls, coordinates and manages the other factors of production in yielding
a greater output. The reward is profit.
Functions of entrepreneur
1. Decision taking: it takes all the vital decision and has the final say of what the decision is
going to be.
2. Efficient management: it manages capital and workers in yielding a greater output.
Entrepreneur finds out how many workers are needed.
3. Enhance quality of work: for one to be enhanced, then there should be training, educating
workers.
4. Risks bearing: entrepreneur is a risk taker. If he manages to succeed, he will be rewarded
with profit, otherwise, he will be rewarded with loss.
5. Coordinator of other factors: he makes sure that the company is located in a viable area
and knows the amount of capital to be used and the amount of money to be given to
workers.

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6. Organization of research: research brings new techniques of production.
7. Miscellaneous functions: he will see to the welfare of his workers, also retrench workers
that are not productive.