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The aim of production is to produce the goods and services that we
want. There are four requirements for production of goods and services.
Every production is organised by combining land, labour, physical
capital and human capital, which are known as factors of production.
The first requirement is land, and other natural resources such as
water, forests, minerals etc. The second requirement is labour, i.e. people
who will do the work. Some production activities require highly
educated workers to perform the necessary tasks. Other activities require
workers who can do manual work. Each worker is providing the labour
necessary for production. The third requirement is physical capital, i.e. the variety of inputs
required at every stage during production. What are the items that come
under physical capital? Tools, machines, buildings can be used in
production over many years, and are called fixed capital. Production
requires a variety of raw materials such as the yarn used by the weaver
and the clay used by the potter. Also, some money is always required
during production to make payments and buy other necessary items.
Raw materials and money in hand are called working capital. Unlike
tools, machines and buildings, these are used up in production.
There is a fourth requirement too. You will need knowledge and
enterprise to be able to put together land, labour and physical capital and
produce an output either to use yourself or to sell in the market. This
these days is called human capital. Investment in human capital (through
education, training, medical care) yields a return just like investment in
physical capital. This can be seen directly in the form of higher incomes
earned because of higher productivity of the more educated or the better
trained persons, as well as the higher productivity of healthier people.