Factors of Production: Natural Resources and Land

Economists consider natural resources to be the third factor of production. They are a contribution to productive activity made by land (for example, a factory site or farm location), raw materials such as iron ore, timber, oil, water for crops and power production, forests and animals.

Some natural resources, wheat, for example, are renewable; others such as iron ore are non-renewable and will eventually be used up. Economists know reduced supplies of non-renewable resources to result in their higher prices, which provide an incentive to look for natural or synthetic substitutes for them. The supply of land, an essential natural resource, is limited and it cannot be easily increased to meet an increase in demand except in certain cases. For example, the Dutch have been able to reclaim from the sea some areas of low-lying land.

Another essential characteristic of land is that it is durable, that is, land is not used up in the production process, although it may be depleted by use.
Land is, in some respects', close to physical capital, though the former is supplied by nature and man produces the latter. Nevertheless, applying labour to kill weeds or fertilizer to improve the soil, farmers can "produce" better land and raise its price.

Price of or income from land, as well as from other natural resources, is called rent. Land itself has no cost of production, so rent depends on the degree of scarcity and on the demand for it.

The purposes for which land is used are due to its characteristics. Land can be used for housing or offices, for mining, or for building roads. Besides, it contributes to the production of crops, providing an environment that supplies water, air, and nutrients for plant growth.

Land as a unique agricultural resource poses management problems for the farmer. In the first place, the farmer has to make a choice between buying and leasing it. The advantages and disadvantages depend on the farmer's financial position, on the availability of land for lease and purchase and some other factors.
Because purchasing land usually requires a larger capital, farmers with limited capital lease land and use their capital for machinery and other resources.
Economists consider a satisfactory lease to be the one that is profitable both for the landowner and for the tenant. A fair lease compensates both parties in proportion to heir contributions to the farm business.

Other management problems may arise due to differences in land profitability in various farming branches and other industries. Economists know different crops and classes of animals to vary in profitability. The farmer has to study thoroughly the conditions on his farm to make a correct choice between alternative uses.
Although the total supply of land is limited, its allocation between industries is not. If a government wants to stimulate, for example, either housing or afforestation, it offers a subsidy raising the rent received by owners of housing land or forests. This may create incentives for farmers to transfer land from farming to other industries.

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