Factors of Production, Essay Example

The production factors of are land, capital, labor, and enterprise.  These factors assist in the production process. Any production process must employ these factors of production in order to provide output. The factors of production facilitate the processing of production inputs to yield product outcomes. Land implies the physical environment or the natural resources employed in the production of the commodity. The returns from this factor of production are rent. Labor refers to the human physical and mental input used in the production. The returns for the provision of labor are wages.  Capital is also a factor in production and can be either financial capital or in the form of assets. The returns of capital are interests. The final factor of production is enterprise. This is the skillful combination of the other factors of production in order to maximize gains and reduce looses. The returns to enterprise are profits.

Enterprise is an essential factor in the production process as it is what leads to profits. Without enterprise, the combination of all the other factors will not yield any positive outcome. It is entrepreneurship that drives profitable production through skill and enterprise. The quality of outcome from the enterprise used in the production process depends of skill and initiative taken by the entrepreneur. The limits to this factor of production are lack of skill initiative and knowledge in the production process. The acquisition of the skill necessary to facilitate entrepreneurship restricts the quality of enterprise used. Where the entrepreneur has more skill and enterprise it translates to higher profits. In order to employ enterprise in production, it is essential to have knowledge and skill in effective production procedures.

Substitute and Complementary Goods

Substitute products are those commodities that can be consumed on behalf of the other. Substitute goods mean that where there is a lack of products another product can be used in its place. Substitute products have a relationship with each other where the quantity demanded of a product connects with the price of the substitute product. With the increase in price of a product, the quantity demanded of the substitute product also increases. Where the price of a commodity drops the quantity demanded of the substitute reduces. Consumers tend to choose the products with lower prices among the substitutes. Examples of substitute goods are butter and margarine or tea and coffee. When the price of tea increased the consumers will opt for coffee and vice versa. The relationship between this two is, therefore, substitution.

Complementary goods, on the other hand, mean goods which rely on each other. The relationship is that a product demand of a primary commodity shapes the demand complimentary of a good. Where product A is a compliment product to product B the quantity demanded of A relies on the quantity demanded of B. With an increase, in the demand for B the demand for A also increases. An example of a complimentary commodity is gasoline. The consumption of gasoline is dependent on the availability of cars. The relationship between cars and gasoline is a complimentary relationship. Where there is an expansion in the demand for cars it will translate to the increased consumption of fuel.

Monopolistic Competition

Monopolistic competition denotes a form of imperfect competition in market structures.  The assumptions of this competition are that there are many consumers as well as buyers which mean that the concentration ratio is low. The products from the producers are differentiated, and non price differences exist between the goods. The producers’ are the ones who decide on the product prices, and exit and entry barriers to the market structure are low.

An example of a consumer product based on monopolistic competition is pizza delivery. The delivery of pizzas based on this market structure means that each delivery service fixes its own prices and the level of output. The entrepreneurship skills are essential to any player in the industry as this will translate to the level of output. An essential factor in the success in of any individual in this structure can be manipulated by the use of publicity. The more advertised a service gets the more the gains a firm gains in this market structure. The players are profit maxi misers as they tend to be small but with a lot of enterprise. The other firms within the competition will adapt the methods of the competitors in order to maximize market share and gain up on the competition. The competition between these firms is fierce there is the inevitable need to advertise in order to maximize gains. The long term profits of a firm in this competition tend to diminish. The explanation for the reduction of profits in the long run is that during the initial stages the firm faces little competition from other firms.  This position does not hold for long because due to the abnormal profits which attract other firms and subsequently the demand for the product reduces resulting in a reduction of profits.