Factors of production and circular flow of income Coursework - 1

Factors of production and circular flow of income - Coursework Example This assumption is made in order to facilitate deductions from theories, holding all except one variable constant. For example the demand curve is drawn holding all factors affecting demand, except price, constant. (Wessels, 2006) Economics is built upon three concepts of scarcity, choice and opportunity cost. Scarcity refers to unlimited wants and limited resources that involve making a choice as resources need to be allocated in alternative uses. All economic agents face the basic economic problem and the choices they make involves a tradeoff. (Wessels, 2006) Economics can be divided into two parts that is Microeconomics and Macroeconomics. Microeconomics deals with individual units such as households, firms, markets etc. for example individual demand for bicycle in the economy, or market demand for cars. On the other side Macroeconomics deals with aggregates and the economy as a whole, i.e. what determines the price of all goods. For example aggregate demand for all goods and serv ices in the economy. (Wessels, 2006) Analyses in economics are based on positive and normative statements. Positive statements refer that can be checked against evidence for example an increase in interest rates encourage savings. While normative statements refer to what should be , for example firms should be encouraged to invest. (Wessels, 2006) Factors of Production Land refers to natural resources that are created by nature and not those earning assets created by man. Labour refers to the physical and mental ability of a human provided to a firm. It includes the part of human population that is willing to provide to economics production. Capital that is also called as ‘reproducible capital’ that is the sum of earning asset created by man, while the last Entrepreneur is the risk taker and organizes other three factors of production. (Mokyr, 1985) There are certain characteristics of different factors of production but two common characteristics in all includes that a ll factors of production are limited in amount and they have alternative uses as well. At any point in time one can increase the amount of land, capital and labour it has but it important to note is that it is finite and cannot increase beyond its fixed a capacity. More over these factors of production can be used to produce many different goods and services and hence are substitutable and interchangeable at many levels. This helps one to decide what, how and for whom to produce. (Goldberg, 2000) Characteristics of labour are important in determining wages and volume of production. Firstly labour is a human factor and the active factor. It has its own will to do anything, likes dislikes and so needs to work along with other factors in production. Also labour is different in efficiency, skills, also is mobile and perishable. Each labour has different efficiency and can be moved between jobs. Quality of labour can be improved by improving its productivity by training, educating workfo rce and by providing them better medical facilities. (Marshall, 2007) Land is the primary and passive factor of production as it is the basis from which production starts and it cannot do anything itself as it has be operated by labour. It could be used in multiple ways such as for agriculture; setting up factory but it