Factors of Production

The four factors of production are inputs used in various combinations for the production of goods and services to make an economic profit. The factors of production are land, labor, capital, and entrepreneurship.

They are the inputs needed for supply. Mainly, the factors of production consist of any resource that is used in the creation of a good or service.

Since these factors are limited by nature, and human wants are unlimited, we, as a country, 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. For example, in a Capitalist economy, the factors of production are owned by individuals who use them for their own profit.

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


Four Factors of Production

1. Land/Natural Resources

Land refers to all natural resources. These resources are gifts that are given by nature. Some typical 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. The income earned from land or other such natural resources is called rent.

2. Labor

Four Factors of Production labor

Labor, as a factor of production, involves any human input. The quality of labor depends on the workforce’s skills, education, and motivation. Generally speaking, the higher the quality of labor, the more productive is the workforce.

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

Here capital refers to manufactured resources such as factories and machines. These are man-made goods used in the production of other goods. Their use in commercial production is what separates them from consumer goods.

Some other 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

An entrepreneur is someone who takes on the 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 an entrepreneur receives is called profit as a reward for the risk they take.

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.

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