Human Capital and Factor Payments

<Last updated 13.04.2020>

Dear reader,

Hi! If you are interested in Economics, I’ve prepared the below to help your understanding. You should take a look at this short article in which I explain what we mean by “Human Capital” and discuss the types of Factors of Production that exist in the economy.

In order to acquire factors of production they have to be purchased from their owners. The owners are willing to provide them to businesses given that they will receive a payment (this is their price). The type of payment that each owner receives is based on the type of factor of production provided:

One important factor of production is human capital. We are not referring to human beings in respect only to their physical capabilities, but rather to everything about them that can be used in the production process. Such as:

>  Labor: The aggregate of all human physical and mental effort. Physical effort: effort that involves physical strength, use of muscles and movement of the body. For example working as a construction worker needs strength end endurance. On the other hand we have mental effort: the amount of cognitive work,  the use of the brain and thinking which is part of the production process.

Depending on the qualifications and experience needed for exercising a profession and the time needed for acquiring them, labor is distinguished between skilled and unskilled labor. Unskilled labor limited skill set and lower educational attainment. (general cleaners, retail salesperson). To attain skills for exercising skilled labor, long-term training and experience is required. (Lawyer, Architect, Financial Adviser).

>Entrepreneurship: Without this, businesses don’t exist. Entrepreneur is the person who brings together the factors of production necessary to produce goods and services, sets up a business or businesses and takes on financial risks in the hope of profit. Entrepreneurial functions include risk bearing, organizing, and innovation. The entrepreneur is the one that suffers the financial damage if, for any reason, either by his doing or other cause, the business fails.

Technology: the application of scientific knowledge for practical purposes, the evidence of research and experiences applied in production, especially in industry. The way the factors of production are combined (the know-how), the way of doing something more efficiently and effectively.

We have already discussed how businesses buy resources from households, factors of production. The price for these resources are called factor payments. For example, the payment given to employees is their income, their hourly wage, this is the price and so it is part of the business cost for acquiring labor. A monetary compensation for services offered (or remuneration, personnel expenses).

> Another example is rent that has to be paid for land or offices provided to the business.

> Another is the interest that has to be paid which is essentially the price for borrowing money capital.

Many businesses borrow in order to fund their economic activities, in example: banks are providing them the funds through lending and thus they owe interest.

Entrepreneurship receives Profit, the financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, receives payment for his/her services. This is supposed to be a relatively higher amount than what labor is paid, since it involves business setup, skilled labor and higher risk. Higher risk must relate to high reward.

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou