What are the factors of production in commerce?

The factors of production are resources that are the building blocks of the economy; they are what people use to produce goods and services. Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship.

The first factor of production is land, but this includes any natural resource used to produce goods and services. This includes not just land, but anything that comes from the land. Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the production process. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.

The second factor of production is labor. Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school. It includes an artist's creation of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people.

The third factor of production is capital. Think of capital as the machinery, tools and buildings humans use to produce goods and services. Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans. Capital differs based on the worker and the type of work being done. For example, a doctor may use a stethoscope and an examination room to provide medical services. Your teacher may use textbooks, desks, and a whiteboard to produce education services. The income earned by owners of capital resources is interest.

The fourth factor of production is entrepreneurship. An entrepreneur is a person who combines the other factors of production - land, labor, and capital - to earn a profit. The most successful entrepreneurs are innovators who find new ways to produce goods and services or who develop new goods and services to bring to market. Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. 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. Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely. The payment to entrepreneurship is profit.

You will notice that I did not include money as a factor of production. You might ask, isn't money a type of capital? Money is not capital as economists define capital because it is not a productive resource. While money can be used to buy capital, it is the capital good (things such as machinery and tools) that is used to produce goods and services. When was the last time you saw a carpenter pounding a nail with a five dollar bill or a warehouse foreman lifting a pallet with a 20 dollar bill? Money merely facilitates trade, but it is not in itself a productive resource.

Remember, goods and services are scarce because the factors of production used to produce them are scarce. In case you have forgotten, scarcity is described as limited quantities of resources to meet unlimited wants. Consider a pair of denim blue jeans. The denim is made of cotton, grown on the land. The land and water used to grow the cotton is limited and could have been used to grow a variety of different crops. The workers who cut and sewed the denim in the factory are limited labor resources who could have been producing other goods or services in the economy. The machines and the factory used to produce the jeans are limited capital resources that could have been used to produce other goods. This scarcity of resources means that producing some goods and services leaves other goods and services unproduced.

It's time to test your knowledge with a little game I like to call, Name That Resource. I will say the name of an item and you will identify it as one of the four possible resources that form the factors of production: land, labor, capital, or entrepreneurship.

• Coal... land
• Forklift... capital
• Factory... capital
• Oil... land
• Michael Dell... entrepreneur

It's time to wrap things up, but before we go, always remember that the four factors of production - land, labor, capital, and entrepreneurship - are scarce resources that form the building blocks of the economy.

The four factors of production are land, labor, capital, and entrepreneurship. They are the inputs needed for supply. They produce all the goods and services in an economy, measured by gross domestic product. 

Land as a Factor of Production

Land includes all of the natural resources available to create supply, such as raw ground and anything that comes from it. 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, crude 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.

The United States is blessed with an abundance of easily accessible natural resources, including fertile land and water. It has miles of coastline, lots of oil, and a moderate climate. That's an advantage over Canada, which has similar natural resources, but they are not always as accessible due to permafrost covering parts of the country's land. Climate change is beginning to alter that, thawing permafrost in some areas and increasing access to oil and other natural resources. Climate change also will make it harder for Canada to utilize natural resources in some regions. It will reduce water supplies to its oil sands in Alberta, which may lead to a reduction in production.

Labor as a Factor of Production

Labor is the work done by people. The value of the workforce 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. 

The United States has a large, skilled, and mobile labor force that responds quickly to changing business needs. It also benefits from productivity increases due to technological innovations. On the other hand, the U.S. labor force faces increasing competition from other countries. That's one reason why American jobs are being outsourced.

The Bureau of Labor Statistics measures the U.S. labor force. It releases the current U.S. jobs report the first Friday of each month. The report includes the employed and the unemployed. The employed only include people over 16 who worked in the past week. It excludes the active military and any residents of an institution. The unemployed are those who actively looked for a job in the past month. All the other jobless are not members of the labor force. 

Capital as a Factor of Production

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.

The United States is a technological innovator in creating capital goods, from airplanes to robots. That's why Silicon Valley is a critical comparative advantage in the global market.

The U.S. Bureau of the Census releases information on capital goods production with the monthly durable goods orders report. It reports on total capital goods order, shipments, and inventory. It also strips out defense and transportation. Those orders come in large batches. It can hide the real trends. Capital goods production has declined since the Great Recession of 2008. Demand for them hasn't returned to the same levels. As a result, companies aren't investing in new equipment. They are buying back stock shares, purchasing new businesses, and looking for opportunities overseas.

Entrepreneurship as a Factor of Production 

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.

The majority of entrepreneurs in the United States own small businesses. There are 30.2 million small businesses in the United States, and 47.5% of employees work for a small business. One reason small businesses do so well is that it's relatively easy to get funded compared to other countries. Others raise money on the stock market by issuing an initial public offering. Shares in these companies are called small-cap stocks. 

Who Owns the Factors of Production

Ownership of the factors of production depends on the type of economic system and society. 

Why Some Think There Are Five Factors of Production

Capital finance is sometimes called the "fifth factor of production, but that's not accurate. Money facilitates production by providing income to the owners of production.

Frequently Asked Questions (FAQs)

Why are the factors of production important?

Together, the factors of production make up the total productivity potential of a given economy. Understanding their relative availability and accessibility helps economists and policymakers assess an economy's potential, make predictions, and craft policies to boost productivity.

How do the four factors of production interrelate?

All four factors are necessary for production, and each has an impact on the others. For instance, more available capital can inspire more entrepreneurship, which necessitates more land and labor for production. Abundance or constraints on any of the factors will inevitably affect the others.

What are the 4 factors of production?

What are the 4 factors of production and give examples?

What are the factors of production explain?

What are the five main factors of production?