The four factors of production are land, labor, capital and entrepreneurship. These factors influence economic growth, innovation and consumer habits. In a capitalistic economy, profit is the focus when selecting which factors of production are most important to an entrepreneur. Learning about this economics component helps consumers become more knowledgeable and potential entrepreneurs better understand their options.
The idea behind the four factors of production comes from neoclassical economics. This theory focuses on supply and demand as the most important concepts driving production, consumption and pricing.
The factors of production emerged from key areas that were most important to producing goods and services that consumers wanted. Our view of productive factors changes as the modern understanding of economics evolves.
Initially, land, labor and capital were the primary factors of production, thanks to political economists like Adam Smith and Karl Marx. Today, we also include entrepreneurship in this list.
What Are Factors of Production?
Factors of production are the resources that individuals use when creating goods or services.
They are essential to the economy's functionality, and owners value them for their profitability or usefulness.
Land
This includes natural resources that people use to produce goods and services. Resources that come from the land or nature fall into this category. This has a broad scope, especially when considering how many resources people can extract from the land and how the land itself is a resource in many cases.
Land as a factor of production is a requirement in some industries, such as real estate, mining or agriculture, and less necessary in others, such as technology.
Examples of land as a factor include:
Labor
Labor as a factor of production refers to the working people that help create and produce a good or service. Any time a person receives payment for a job, they are contributing labor resources.
The quality of this productive factor depends on motivation, skill and education. When there is higher quality labor, there is a more productive workforce.
Labor can refer to a wide range of work types and roles, from the extremely physical (e.g., construction workers, athletes, stonemasons, etc.) to the highly mental (e.g., artists, programmers, counselors, etc.).
Examples of labor as a factor include:
Capital
Machinery or tools fall into the capital factor of production. This category would include anything tangible and manufactured that people use when producing goods and services.
Capital factors would not include items or tools meant for consumers. It strictly refers to commercial tools that help with production.
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Companies may spend more on capital goods to raise production levels, often after economic growth.
Examples of capital as a factor include:
Entrepreneurship
Entrepreneurship refers to people combining the other three production factors to create a profitable operation.
Generally, successful entrepreneurs innovate and produce a new or improved method for providing goods and services. It may also include entrepreneurs that create an entirely new product or service.
Entrepreneurs contribute to economic growthin huge ways, directly impacting other production factors. Therefore, governments and local agencies may encourage entrepreneurship throughpolicy creationto promote this opportunity.
How the Four Factors Connect
The four factors of production connect based on their use in specific industries. Industries may rely on one or two factors more than others, but they typically all remain important to some capacity in the production processes.
An example of entrepreneurship is the McDonald’s Corporation. This global fast-food chain requires:
Who Owns the Factors of Production?
Different parties own the factors of production under each economic system. The only exception is labor. The person performing the labor, or completing the work, owns this directly.
Private enterprises and individuals own most of the land and capital productive factors in capitalistic societies. Potential profit is the driving factor when owners decide to buy or sell factors of production.
In capitalistic economic systems, such as in the United States or Australia, those controlling production factors typically have great wealth and power because they manage the creation, production and distribution of the goods and services people need.
As such, owners may have more control over the pricing of these factors, making them more or less expensive based on demand.
In socialistic or communistic societies, however, factors of production are for everyone. The factors have value based on usefulness, so the focus is on ensuring all factors of production serve a purpose.
Top Takeaways
What are the four factors of production?
(Reporting by NPD)
