Factors of Production

Factors of production is an economic term that describes the inputs that are used in the production of goods or services in order to make an economic profit. The factors of production include land, labor, capital and entrepreneurship. These production factors are also known as management, machines, materials and labor, and knowledge has recently been talked about as a potential new factor of production.

Land is short for all the natural resources available to create supply. It includes raw land and anything that comes from the land. It can be a non-renewable resource.

That includes commodities such as oil and gold. It can also be a renewable resource, such as timber. Once man changes it from its original condition, it becomes a capital good. For example, oil is a natural resource, but gasoline is a capital good. Farmland is a natural resource, but a shopping center is a capital good.

The income earned by owners of land and other resources is called rent.

Labor is the work done by people. The value of labor depends on workers’ education, skills, and motivation. It also depends on productivity. That measures how much each hour of worker time produces in output.

The reward or income for labor is wages.

Capital is short for capital goods. These are man-made objects like machinery, equipment, and chemicals, that are used in production. That’s what differentiates them from consumer goods. For example, capital goods include industrial and commercial buildings, but not private housing. A commercial aircraft is a capital good but a private jet is not.

The income earned by owners of capital goods is called interest.

Entrepreneurship is the drive to develop an idea into a business. An entrepreneur combines the other three factors of production to add to supply. The most successful are innovative risk-takers.

The income entrepreneurs earn is profits.