The things that are essential for the production process can, thus, be identified as
i. Land and building
ii. Capital real (such as plant, equipment, machinery) and finance (such as, money)
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iii. Labour,
iv. Entrepreneur (the organiser who procures all the above and combines them in a desired manner so as to convert basic materials into finished products)
They are known as the four factors of production.
Let us attempt to know a little more about these factors of production.
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(i) Land and Building:
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Land and building is a fixed factor of production. This is so because it is not possible to increase its supply at short notice whenever more is desired to be produced. Generally, it is owned by the producer but can also be had on monthly rentals from its owners.
From the viewpoint of the firm (the factory producing goods or services), whether it is owned by the owner of the firm or rented from someone else for the purpose, it is simply a factor of production to be compensated by the firm every month at the market rate of rent in the same way in which manpower and other factors of production are compensated.
If the owner of the firm owns the land and the building himself, rent is paid to him by the firm every month and is known as the imputed rent. It should be borne in mind that the firm is a separate entity and its owner is either a creditor or a factor of production who provides land/building, capital and entrepreneurial skills to the firm and is to be compensated by the firm for all these.
(ii) Capital:
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Capital refers to productive assets that participate in production directly. Examples are tools, equipment, machinery and plant. There are two types of capital—real and financial. Real capital refers to tangible productive assets participating directly in production while financial capital refers to cash, shares, debentures and such other instruments which do not take part in the production process directly but help in the procurement of factors of production.
Capital, in economics, refers to real capital. Compensation made to this factor of production by the firm is interest. Capital, like land and building, is treated as fixed in the short run but unlike land and building, it is variable in the long run.
(iii) Labour:
Labour refers to manpower or human resource participating in the process of production. It includes workers of all categories—skilled or unskilled, menial or manual, specific or non-specific, experienced or inexperienced. It is compensated by the firm on the basis of the price it commands in the market.
Compensation made to permanent workers is known as salaries while that made to the temporary hands as wages. Permanent hands are entitled to some compensation in kind, such as, rent-free accommodation, medical reimbursements, free transport and also some post-retirement benefits.
Even the entrepreneur is treated as a part of the manpower by the firm and is entitled to compensation for the use of his/her organizational skills in one way or the other. Labour, except certain categories, is treated as variable both in the short and long runs.
(iv) Entrepreneur:
Commonly known as the producer or the owner of the firm, the entrepreneur is a factor of production generally .befitting no single and precise definition. He is a risk-taker who ventures all his eggs to the same basket with the conviction that he would not let any harm come to his basket.
He is confident of success of his venture. He thinks he knows what he is doing and that no amount of distraction can ever deviate him enough from the path he has set for his activities. He is even a perfectionist, according to some thinkers.
The author may be sounding like someone who has a very strong bias in favour of the entrepreneur. Perhaps, but this is how literature on entrepreneurship describes an entrepreneur. Entrepreneurial skills are also treated as fixed in the short and long runs.