In economics, “factors of production” are the resources used to produce goods and services, typically categorized as land, labor, capital, and entrepreneurship. 

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          20.1     TYPES OF FACTORS OF PRODUCTION

• Land: Natural resources used in production (e.g., minerals, water, forests).
• Features – Fixed supply, immobile, and subject to diminishing returns.
• Reward – Rent.
• Labor: Human effort and skills used in the production process.
• Features – Variable supply, can be skilled or unskilled, and influenced by education and training.
• Reward – Wages / Salary.
• Capital: Man-made resources used to produce goods and services (e.g., machinery, buildings).
• Features – Can be increased through investment, subject to depreciation.
• Reward – Interest.
• Entrepreneurship: The ability to combine the other factors of production to create goods and services, taking risks in the process.
• Features – Innovative, risk-taking, and responsible for decision-making.
• Reward – Profit.

          20.2     DETERMINATION OF WAGES, INTEREST, AND PROFITS

• Determination of Wages: Determined by the supply and demand for labor, productivity of workers, and bargaining power of labor unions.
• Determination of Interest: Determined by the supply of savings and demand for investment funds, influenced by the liquidity preference of individuals and businesses.
• Determination of Profits: Determined by the difference between total revenue and total costs, influenced by market competition, pricing strategies, and operational efficiency.

          20.3     THEORIES OF FACTORS OF PRODUCTION

• MARGINAL PRODUCTIVITY THEORY OF WAGES

The marginal productivity theory of wages suggests that wages are determined by the marginal productivity of labor. Workers are paid according to the additional value they bring to production. If a worker contributes significantly to output, they will receive higher wages.

• LIQUIDITY PREFERENCE THEORY

The liquidity preference theory as proposed by John Maynard Keynes, this theory explains the determination of interest rates based on the preference of individuals to hold liquid assets (cash) versus investing in illiquid assets. The interest rate is determined by the supply and demand for money.

          20.4     MOBILITY OF LABOUR

It refers to the ability of workers to move freely between different jobs, industries, or geographical locations in response to changes in demand for labor.

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TYPES OF MOBILITY OF LABOUR

• Geographical Mobility: Refers to the movement of workers from one location to another, such as migrating from rural areas to urban centers for better job opportunities.
• Occupational Mobility: Involves changing jobs or professions, such as a teacher becoming a corporate trainer.

FACTORS INFLUENCING LABOUR MOBILITY

• Economic Conditions: High unemployment rates or job shortages can encourage workers to move to areas with better job prospects.
• Education and Skills: Workers with higher education and specialized skills are more likely to change jobs or industries.
• Family and Social Ties: Family commitments and social networks can either facilitate or hinder mobility.
• Wages and Benefits: Higher wages and better benefits in a different location or job can motivate workers to relocate or change careers.

          20.5     UNEMPLOYMENT

It refers to the situation where individuals who are capable of working and are actively seeking work are unable to find employment.

TYPES OF UNEMPLOYMENT

• Frictional Unemployment: Short-term unemployment that occurs when people are between jobs or entering the labor market for the first time.
• Structural Unemployment: Long-term unemployment resulting from changes in the economy, such as technological advancements or shifts in consumer demand that make certain skills obsolete.
• Cyclical Unemployment: Unemployment that occurs during economic downturns or recessions when demand for goods and services decreases.
• Seasonal Unemployment: Unemployment that occurs at certain times of the year when demand for labor is lower, such as agricultural workers during off-seasons.
• Long-term Unemployment: Refers to individuals who have been unemployed for an extended period, typically longer than six months.

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CAUSES OF UNEMPLOYMENT

• Economic Recession: A decline in economic activity can lead to job losses and increased unemployment.
• Technological Change: Automation and advancements in technology can displace workers whose skills are no longer needed.
• Globalization: Increased competition from foreign markets can lead to job losses in domestic industries.
• Labor Market Policies: Regulations, such as minimum wage laws or unemployment benefits, can impact hiring practices and job availability.