The Factors of Production

The main questions of any economy is what to produce, how to produce, for whom to produce and how much to produce. Production is an important area in business. Production cannot take place unless the necessary resources are available. We are all familiar with these resources. Factories, railways, farms, mines, human skills, offices and shops – we identify these things as economic resources. Resources are all the things used in pro­ducing goods and services. Economists use the term factors of production when they talk about resources. For the purposes of an analysis, economists use a broad classification of these factors of production. There are different approaches to it. According to the classical approach, the factors of production are usually divided into three main types: land, labour and capital. Sometimes factors of production comprise four or even five categories: land, labor, capital, entrepreneurship and technology.

Labour refers to all aspects of human effort used up in producing a good or a service and all the people who work. Labor includes full- and part-time workers, managers and professional people in both private and public sectors. Companies should spend a lot of money training employees because economies with well-educated and well-trained labour force have an advantage over other countries in attracting business.

Land refers to all natural resources used to produce something else. Land includes everything contained in and on the earth or found in the seas: soil, minerals, forests, waters and the surface of the earth on which production activities may be carried out. Coal, gas and crude oil are natural resources, and so is a lake and all of the living things in the lake. Trees and plants, as well as the soil in which they grow, are natural resources. These natural resources are used as raw materials for making goods and creating services for customers. Some countries’ climate and geog­raphy are perfect for attracting tourists and are considered their resources. For example, Swit­zerland has skiing and enjoying mountain landscapes. For this coun­try, the tourist trade is an important industry that helps to support the economy.

Capital is the term used for all man-made resources. It includes the goods used in the production process. Factories, office buildings, pieces of machinery, computers and tools are all consid­ered capital resources and help people produce still more goods and services. Raw materials that have been processed into a more useful form (such as lumber or steel) are also considered capital. Capital also includes money to start and oper­ate a business. Without the capital to run a business, market­ers would not have the resources needed to develop, advertise and trans­port goods. Capital includes infrastructure, which is the physical development of a coun­try. This includes roads, railways, ports, airports, sanitation facilities and utilities, telecommu­nications, and so on. These things are necessary for the production and distribution of goods and services in an economy.

Some economists often identify a fourth factor – enterprise or entrepreneurship. Entrepreneurship refers to the skills of people who are willing to invest their time and money to run a business. Entrepreneurs orga­nise factors of production to create the goods and services that are part of an economy. They are the employers of a population. Other scientists talk about one more factor of production – technology that includes scientific and innovative manufacturing methods.

The terms are not precise ones, but their general purpose is clear: they help us to categorise all elements involved in the production process. This classification is not completely satisfactory because it is sometimes difficult to allocate real resources into these neat categories. For example, land which has been fertilised, drained and fenced is really a combination of land and capital; even within each broad category there are very wide divergences. Nevertheless, the classification is still most commonly used and it serves to assist an economic analysis.