Definition: Factors of Production in economics are inputs that a business uses to produce a good or service. In other words, these are the building blocks or materials and supplies that businesses use to create goods and service in an effort to make a profit.
What Does Factors of Production Mean?
Traditional economics breaks these materials into four factors of production:
Land – consists of the physical land used by the business as well as the raw materials that comes from the land.
Labor – consists of all workers in a company including machinists, administrative, professionals, executives, and anyone else who works for the company.
Capital – consists of the buildings, plants, and equipment needed to produce a product or service. It can also include intellectual capital like trade secrets and special ways of producing products. Social capital can also be lumped in this category. This is a societal agreement or rule that allows the company to operate the way it does: for example a free market.
Entrepreneurship – the drive, leadership, and intellect required to use the other three factors to run a business and produce a product.
Let’s look at an example of a business using all of these.
Mary is an aspiring entrepreneur who wants to commercialize her new method for making paper. Before she can start producing a product, she will need a few things—the four factors.
She needs machines to create her product, land as a place to build her factory and expand her services, and management and labor in order to run her business effectively. The fact that she wants to start her own business is, in and of itself, a factor of production. Without entrepreneurship there would be no companies created and no goods delivered to consumers.
Even when Mary has her business up and running, there is still a vital need for multiple factors of production. If she wants to expand her factory, what does that require? It requires more land for the factory, more labor or management to staff that new area, more capital to create paper, and more entrepreneurship in order to make it all worthwhile. Although factors of production might be simple, they are the foundational pieces for any successful business that continues to grow.