Factor Of Production

Factor Of Production

Factor of Production In economic analysis, however, it is more meaningful to group together all similar factors, whether acres, workers or capital goods, and to consider each group as a separate factor of production. Each unit of any given factor is then a perfect substitute for any other unit. This method gives a large number of factors of production; but it permits generalization about the principles on which factors are combined and incomes shared out amongst their owners. The main uses of the concept of factor of production in current analysis are in the theory of production, which has been developed to explain choices made between alternative combinations of resources, the theory of factor prices, which together with ownership determine the distribution of income, and the theory of costs of production, which depend upon the combinations of resources chosen and the prices that have to be paid for them.

In these contexts distinctions are made between specific and versatile (non-specific), fixed and variable, and divisible and indivisible factors. Specificity and versatility are in practice matters of degree. The sharp distinction drawn in economic analysis is enlightening, however, because with a completely specific factor the economic problem of its use is the simple one of deciding whether its unique product has value, whereas versatile factors pose the more complicated problem of ensuring that they are not used for any purpose which is less highly valued than alternatives. Fixed factors are those whose cost is constant over a range of outputs, e.g. a bridge or a machine; variable factors are those whose quantity employed and cost vary continuously with output, as raw materials. This distinction is important in explaining why firms that have 'sunk' costs in fixed factors may choose temporarily to work at a loss (in the sense of covering amortization charges incompletely) so long as the costs of the variable factors are covered. Divisible factors are those whose input may be adjusted to output finely. Indivisible factors are available only in minimum sizes. Hence indivisibility helps to explain economies of large-scale production, which are reaped when output is large enough to employ indivisible factors more fully.

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