What are the four factors of production?

What are the four factors of production?

What are the four factors of production : land, labour, capital and entrepreneurship.

For what do we use four factors of production?

Four factors of production play a very important role in the production process of goods and services and economic development.

Production means the process of manufacturing and creating of goods and services. So for this process, we use factors of production as the inputs.

What are the factors of production?

We use factors of production in different ways to generate economic profits. So, factors of production are defined as the inputs required to supply within a market economy, or any resources required to generate finished goods and services.

There are two major types of goods. They are economic goods and free goods.

Also, you may interest to read,

Economic goods definition, characteristics, examples, vs free goods

Free goods characteristics, examples, & vs economic goods

Goods and services can fulfill the needs and wants of people. To read more about needs and wants, kindly click here

According to economists, there are two major types of factors of production. These production factors are primary factors and secondary factors.

Primary factors of production

four factors of production

There are four primary factors of production. They are,

Land

Labour

Capital

Entrepreneurship

Secondary factors of production

Some economists have identified monetary finance or capital finance as a secondary factor of production. But sometimes, it is not 100 percent correct to identify it as a factor of production. Because it is not a real factor of production.

Because we cannot directly input money into the production process. We can buy land, labour, and capital using the money and then utilize these production factors to the production process.  

Therefore, in this article, we will discuss the primary production factors of land, labour, capital and entrepreneurship.

What are the 4 factors of production with examples?

Land as a factor of production

Land is the term that we use to include all the natural resources we can find from the land for the production process (Ex: water, wood, oil, vegetation). It can vary from raw property to commercial real estate.

As a primary production factor, land can generate economic values. Sometimes, land may not a necessary factor for the production process according to the industry’s needs. For example, a software development company may begin as a start-up and launch the products without doing any investment for the land.

When we utilize land for the production process, rent is paid to owner of the land as a compensation.

Examples of land as a factor of production

There are two major types of resources that we can find from the land. They are renewable resources and non-renewable resources.

Renewable resources

These are the resources that can be replenished. Examples of renewable resources are,

Solar energy

Water

Wind energy

Vegetation

Non-renewable resources

These are the resources that cannot be replenished. In other words, when we use non-renewable resources, the supply is depleted.  Examples of non-renewable resources are,

Oil

Natural gas

Coal

Labour as a factor of production

Labour is defined as any human input to an economic venture. In other words, Labour means the individual efforts to produce goods and services. Labour can be utilized in the production process in various forms.

When labour is utilized for production, we pay wages as compensation. So, these wages are based on the time utilization, labour experience, knowledge, and output generated by the labour.

Each industry requires labour to achieve its own objectives, regardless of how much that labour may cost.

Examples of labour as a factor of production

For a business organization, we use many types of labour. As an example, for a restaurant, we need chefs, helpers, waiters, cleaners and so on. Here, efforts of the owner are not considered as labour (it is categorized as entrepreneurship).

Characteristics of labour

1. Labour is heterogeneous. Because the quality and efficiency of the labour differ from one person to another person. Because one person’s knowledge differs from the other person’s knowledge, skills, motivation, work satisfaction and so on.

2. We cannot save up or store the labour. Because labour is a perishable resource. If an employee does not work, it can’t be recovered by working another day. Because the particular time has been lost

3. Labour is strongly associated with human efforts. So, it means that elements like flexible work schedules, treating employees fairly, and secure working conditions all have a significant impact on the labour market.

Capital as a factor of production

In economics, capital means money. But as I mentioned above, money cannot be considered a factor of production since it cannot be directly utilized for the production -process. Using capital the entrepreneur can pay wages, buy land and purchase the capital goods such as computers, machines, raw materials, vehicles and so on.

When we utilize capital for the production process, interest is paid to owner of the capital as a compensation.

But if these capital assets are personal assets of the owner, they are not considered capital. As an example, when a person transports by a family vehicle, it is not considered a capital good of the business. But when a person uses a commercial vehicle for office purposes, it is capital goods.

During the economic recession period, business organizations decrease their capital expenses and during the economic expansion period, business organizations increase their capital investments.

Examples of capital as a factor of production

Machines

Computers

Raw materials

Vehicles

Characteristics of capital

1. Capital is created by the people. For example, computers and vehicles are created by humans. So, capital is different from natural resources.

2. Capital prevails for a long period of time. But, the value of the capital depreciates over time. As an example, a building can prevail for a long period but the value of that building depreciates over time

3. Many capital goods such as vehicles, and equipment can be transported from one place to another place.

Entrepreneurship as a factor of production

The initial investment and subsequent actions taken by entrepreneurs to launch and expand a business are referred to as entrepreneurship as a factor of production.

An entrepreneur combines the other three factors of production (land, labour, capital) and produces goods and services. Therefore, an entrepreneur creates innovative ideas and makes them real.

At the beginning of a business organization, entrepreneurs dedicate their personal capital, land, and labour to the business. Sometimes, they work as the initial employees of the organization. After that, when they expand the business operations, they recruit more labour and buy more capital and land.

So, entrepreneurs are very important to an economy. Because they identify the potential business opportunities and take the risk. Without entrepreneurs, any business organization cannot be operated. Because, there is no other person to combine land, labour and capital than an entrepreneur.

Entrepreneurs receive profit as compensation for their efforts. So, if you wish to read more about the profit, kindly click here

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