Factors of Production: Resources for Economic Activity
Factors of Production
Work
Human activity, both physical and intellectual, is necessary to produce goods and services. Most workers work for others—employers or the state—in exchange for a wage. However, some workers are autonomous, working independently, setting their own organization, and reaping the fruits of their labor.
Employers and employees negotiate the terms of work, usually formalized in a contract that specifies aspects like the trial period, contract duration (permanent or temporary), position and status, holidays, and wages. Often, the interests of employers and employees differ. In many developed countries, especially in Europe, laws governing work activity are established through complex negotiations between the state, employers, and employees, represented by employers’ associations and unions.
Natural Resources
The production process utilizes many resources offered by nature: earth, water, air, plants, animals, minerals, and energy sources. Some of these resources are renewable, meaning they are not exhausted by their use or can be regenerated. However, others are non-renewable. Therefore, companies need to manage natural resources properly to prevent their depletion.
Capital
Capital encompasses all non-natural resources used to produce goods and services. There are three types of capital: physical, human, and financial.
Human capital refers to the training, qualifications, and experience of employees. Generally, the more skilled and experienced workers are, the greater the productivity of an enterprise. For this reason, worker training is becoming increasingly important.
Financial capital is the money needed to start a company and maintain its operations. Sometimes business owners have sufficient funds, but often they must borrow money or apply for government grants to start or continue their businesses.
Technology
Technology refers to the set of procedures used to produce goods and services. Based on the technology employed, there are three types of production: manual, mechanized, and technical.
- Manual production relies on human strength and the handling of tools. For example, a farmer tilling the soil with a hoe.
- Mechanized production utilizes machines to provide power, but workers still operate the tools.
- Technical production involves machines providing both power and control over tools, while workers program the machines and monitor their operation.
Knowledge and Know-How
Human knowledge is a crucial factor for growth. Therefore, a country seeking a modern economy needs a competitive education system and quality research centers. These play a key role in developing individuals equipped for their work and capable of generating new ideas.
Know-how refers to the skills (technical, tactical, etc.) needed to perform an activity. This knowledge can be acquired through various sources, including education, daily work, and the social environment.
Organization of Economic Activity: Economic Systems
An economic system refers to the way goods and services are produced in a society and how benefits are distributed among its inhabitants.
The Subsistence System
In the traditional or subsistence economic system, families produce everything they need to cover their basic needs. They cultivate land for food, build houses with materials from the environment, make their own clothes, etc. Only surplus production is sold or exchanged in the local market, where they can also purchase handcrafted items.
This economic system is found in underdeveloped societies.
The Communist System
The central planning or communist system does not recognize private ownership of the means of production. The state controls all aspects of the economy, deciding what companies produce, in what quantity, and at what price to meet perceived social needs. It also determines how products and benefits are distributed.
This system was widely used for decades but now only survives in a few countries like Cuba and North Korea. China, while still officially communist, is gradually opening its economy to the private sector and foreign investment.
The Capitalist System
Capitalism, also known as the free market system, is the dominant economic system in the world today. It has four main characteristics:
- Private ownership of the means of production: land, machinery, technology, businesses, etc.
- The pursuit of profit as the driving force of economic activity.
- Regulation of production quantity and price through the law of supply and demand. Under this law, the production and price of an item increase when demand is high and supply is low, and decrease when supply exceeds demand.
However, there are cases where these characteristics are not fully met.
- A monopoly occurs when a single company controls the production and sale of a product, allowing it to set the price and quantity supplied.
- An oligopoly exists when a few companies control a product. This situation can also limit the operation of supply and demand if these companies collude to fix prices and conditions that benefit them.