Home ›› 26 Jul 2022 ›› Editorial
Starting your business is like planting a sapling. First, you have to invest your time and money. Then, you must take care of it while expecting nothing in return. But when your startup blossoms, it makes all the patience and hard work worthwhile. However, like saplings, many startups fail to grow – and many die one-to-three years after launch. While there are many factors leading to the failure of a startup, one of the main reasons is the lack of expert startup advice founders receive. Experience of a seasoned entrepreneur is precious -- and no matter how many theoretical models you study, you simply can’t replace the experience they’ve gained through actually doing the work, failing, and succeeding.
Production, distribution, and exchange of goods and services are among the basic economic activities of life. During the period of these economic activities, every society has to suffer from scarcity of resources and it is the scarcity of resources that arises the problem of choice. The scarce resource of an economy has several usages. In other words, every society decides how to use scarce resources optimally? The problems of an economy are often summarized in the following three ways:
What to produce and in what
quantity?
How to produce?
For whom to produce?
These are known as central problems because every society has to face them and look for its solutions. Let us understand these three central problems in detail.
What to produce: This problem refers to the decisions regarding the selection of different commodities and the quantities that need to be produced. Labour, land, machinery, capital, equipment, tools and natural resources are limited. So, it is not possible to fulfil society’s every demand. Therefore, it is important to decide what goods and services are required to be produced and in what quantity? For example, if Rita has a piece of land, she needs to think about what crop she should produce on her land. Let us consider that she can grow either Jowar or wheat. Given that the natural resource i.e. land is limited, she needs to choose whether she wants to use the land to produce millet or wheat or both. Once Rita has taken the decision regarding the goods to be produced, she needs to think about the quantity of the crop that she would like to produce. This problem of ‘what to produce and in what quantities to produce is almost faced by everyone in society.
Also, an economy needs to make decisions regarding whether it wants to use its scarce resources to produce consumer goods or producer goods. Also, to what extent should luxury goods be produced in comparison to producer goods? Also, the economy may be faced with the question of how many civilian goods and defense goods need to be produced. The problem of what to produce and in what quantities to be produced can be solved by a government that retains the authority to allocate resources in different areas of production. Alternatively, it can be solved based on the preferences of people in an economy and on the price of goods and services available in the market. In aggregation, the demand and supply position of any product is primarily responsible to determine the right price of the product. While it’s important to ensure that the producers are able to generate a normal profit after managing the cost of production while the consumers or users are able to absorb the cost without paying an exorbitant price.
How to produce: This problem is about the choice of techniques that need to be adopted and used in the production of goods and services.
The solution to the problem of how to produce is based on the amount of quantity that needs to be produced for a given level of resources. At the same time, the cost of using a technique to produce goods is equally very important. A producer will use that particular technology which is available at minimum cost.
For whom to produce: One of the most crucial problems of the economy is to decide which commodities shall be produced for which sections of society. For instance, essential goods and services are in demand from all sections of society, but only certain sections of society have a demand for luxury commodities. At the same time, choices of goods and services rest on prevalent tastes and preferences in an economy. Hence, considerations regarding the socio-economic conditions of a country or market are highly pertinent to this problem. Lastly, it is important to know that other than resource allocation, central problems of an economy have two more aspects – efficient utilization of the resource and development of resources. Thus, to explain the central problems of an economy, one needs to delve into its core, i.e. choices concerning the limited resources available to maximize socio-economic utility.
The Factors of Production is a term used to categorize all of the resources and contributions that go into producing a good or service. Since these goods and services make up a region's economy, the Factors of Production have a direct connection to how the economy functions. If any of the Factors of Production are scarce or in high demand, it effects and impacts the economy, because the product will then be sold for a higher price or consumed at a greater rate. It is important to remember that the Factors of Production do not necessarily produce the final goods and services that get sold. Often, the Factor of Production will produce an intermediate good or service, or something that then gets translated into a final product in later stages.
Land, labour, capital, entrepreneurship, and these are the things that create all of the goods and services that make up an economy. The factors are unique in themselves, but often also work together in the production of what gets dispensed into society. Listed below are each of the Factors of Production explaining exactly what it is comprised of and also how it is distinctly important to the systems of production.
Land: The first Factor of Production is Land. Land includes anything that is considered a natural resource, but also the physical space within a location as well. The definition for Land can be extensive and includes the different forms of what comes from the land.Some of the resources that Land is responsible for providing include things like oil, coal, timber, or gold. These substances are mined and then turned into marketable products like gas, electricity, lumber, respectively. Additionally, Land is also considered a resource within the real estate market, both residentiall commercially.
Labour: The second Factor of Production is Labor which encompasses the physical exertion of human individuals to produce the goods and services sold. There are many facets to what comprises a person's Labor value, which is specific to the product being produced. When thinking about Labor as a Factor of Production, the individual's skill level, education, and interest in productivity are incredibly important elements. Almost everything we interact with as a society is determined by the Labor of another person. Some examples of this are the individual who assembled the laptop you are using, a bartender mixing drinks, the city bus driver, a journalist writing a newspaper column, or the salesclerk who checks out your groceries. Any person who is being paid a wage to do a job is contributing to the Labor Factor of Production. Specific industries, like Wall Street, technology, or hospitality, are highly dependent on the human Labor factor.
Capital is the third Factor of Production. It is important to remember that this is not referring to money, as the word capital sometimes does in discussions of economics. Rather, what Capital as a Factor of Production means are the created items that are used to produce the goods or services put out. One way to think about Capital is that it is the machines and equipment that complement humans in exerting their Labour in order to produce a marketable good or service. Some examples of Capital are a typewriter that enables an author to produce a novel, an industrial coffeemaker that allows a local coffee shop to make drinks, or the zamboni machine that cleans the ice during a professional hockey game. It is important to recognize that Capital as a Factor of Production does not include machines that are purchased for individual and personal use. A vacuum cleaner purchased for your home is a consumer good and not an example of Capital, but a vacuum purchased to use in your clothing store is Capital as a Factor of Production.
Entrepreneurship which details an individual's ideas, concepts, and emotional effort to produce a product or service to introduce in the economy. Over most of economic history, it had been widely assumed that economic growth stems from enhancements to one or both of the two principal components of an economy – capital and labour. For an economy to grow, it was thought, either the labour market had to expand or capital intensity had to somehow increase. But in 1957, American economist Robert Solow demonstrated that most of economic growth cannot be attributed to increases in capital and labor, but only to gains in productivity – more output per unit of input – driven by innovation. As businesses and workers become more efficient, costs fall, profits and incomes rise, demand expands, and economic growth and job creation accelerate. The formation of new businesses – what we loosely refer to as “entrepreneurship” – is a particularly important component of this process of reallocative efficiency.
Why? Because new businesses enter the market to challenge established firms, products, and method of production and distribution; they bring something new or improved and, in the process of doing so, their emergence promotes a more competitive environment. How important is reallocative efficiency? Well, despite being less exciting than the part of productivity driven by breakthrough technological innovations, reallocative efficiency is important enough to drive macroeconomic performance. In fact, a group of leading economists have identified the slowdown in reallocative efficiency in the American economy during the last two decades as the central culprit for the decline in productivity growth that has occurred over this period.
The companies that entrepreneurs found tend to mirror their founders’ personalities. Entrepreneurs come from every economic and social background. To prepare for the challenges of translating innovation into rewarding business ventures, entrepreneurs rely on the training and experience.
The writer is MD and CEO of Community Bank. He can be contacted at masihul1811@gmail.com
