Four Factors of Production

[dropcap style=”boxed”]T[/dropcap]here are four factors of production: land, labor, capital, and entrepreneurship. These four factors of production are used in the production of goods and services. These factors are limited, and there is unlimited human wants, we face a decision over the efficient allocation of these scarce resources or factors of production.

Sometimes the type of economic system decides the ownership of the factors of production.

Factors of ProductionSocialismCapitalismCommunismMixed
Are Owned ByEveryoneIndividualsEveryoneBoth
Are Valued ForUsefulness to peopleProfitUsefulness to peopleUtility & Profit

Factors of Production

Four Factors of Production

1. Land/Natural Resources

factor of production land

These natural resources are gifts that are given by nature. Some common examples of natural resources are water, oil, copper, natural gas, coal, and forests. These resources can be renewable, such as forests, or nonrenewables such as oil or natural gas. Landowners earn an income for their land called rent.

2. Labor

Four Factors of Production labor

This factor of production involves any human input. If someone has ever paid you for a job, you have contributed labor resources to the production of goods or services. Labor can be physical or mental. The income earned by labor resources is called wages. It is the largest source of income for most people.

3. Capital

Four Factors of Production capital

Here capital refers to manufactured resources such as factories and machines. These are man-made goods used in the production of other goods. Some common examples of capital include hammers, forklifts, conveyor belts, computers, and delivery vans. An increase in capital goods means an increase in the productive capacity of the economy. The income earned by owners of capital resources is interest.

4. Entrepreneurship

Four Factors of Production entrepreneurship

An entrepreneur is someone who takes on risk and brings the other three factors of production together. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. The payment to entrepreneurship is profit.

Other Introductory Economic Terms

1. Normative Statements

Normative statements are statements with values or opinions. You can think of these statements as being more subjective. For example, outsourcing jobs are unfair because it takes away local jobs.

2. Positive Statements

Positive statements are factual statements. You can think of them as being more objective. For example, tax hikes will cut the budget deficit.

3. Free Goods

A free good is a good that isn’t scarce and has zero opportunity cost. For example, air is a free good.

4. Economic Goods

Economic goods are goods and services that require scarce resources or factors of production to produce them.

Opportunity Cost

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