Factors of production


What Are Factors of Production?

  • Factors of production are the inputs needed for creating a good or service.
  • Those who control the factors of production often enjoy the greatest wealth in a society.
  • In capitalism, the factors of production are most often controlled by business owners and investors. In socialist systems, the government (or community) often exerts greater control over the factors of production.
  • In factors of production, the word “production” refers to a process of transforming inputs into outputs, which are finished products that can be sold as a good or service.


The 4 Factors of Production

  • There are four factors of production—land, labour, capital, and entrepreneurship.

  1. Land as a Factor of Production
  • Land is a broad term that includes all the natural resources that can be found on land, such as oil, gold, wood, water, and vegetation.
  • Natural resources can be divided into renewable and non-renewable
  • The income that comes from using land and its natural resources is referred to as rent.
  • Land differs from the other factors of production because some natural resources are limited in quantity, so its supply cannot be increased with demand.


  1. Labour as a Factor of Production
  • This refers to the effort that individuals exert when they produce a good or service.
  • For example, an artist producing a painting or an author writing a book.
  • The value of Labour depends on human capital, which is determined by the individual’s skills, training, education, and productivity.
  • The income that comes from labour is referred to as wages
  • Characteristics of labour in terms of being a factor of production:
    • Labour is considered to be heterogeneous, which refers to the idea of how the efficiency and quality of work are different for each person. It differs because it depends on an individual’s unique skills, knowledge, motivation, work environment, and work satisfaction.
    • Labour is also perishable in nature, which means that labour cannot be stored or saved up.
    • It is strongly associated with human efforts. It means that there are factors that play an important role in labour, such as the flexibility of work schedules, fair treatment of employees, and safe working conditions.


  1. Capital as a Factor of Production
  • This refers to the money that is used to purchase items that are used to produce goods and services.
  • Examples of capital goods include computers, machines, properties, equipment, and commercial buildings.
  • They are all considered to be capital goods because they are used in a production process and contribute to the productivity of work.
  • The income that comes from capital is referred to as interest.


  1. Entrepreneurship as a Factor of Production
  • Entrepreneurship as a factor of production is a combination of the other three factors.
  • Entrepreneurs use land, labour, and capital in order to produce a good or service for consumers.
  • Entrepreneurship is involved with establishing innovative ideas and putting that into action by planning and organizing production.
  • The income that entrepreneurs earn is called profit.

Who Owns the Factors of Production?

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


Additional Information

Why are the factors of production important?

  • 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 labour for production. Abundance or constraints on any of the factors will inevitably affect the others.