Factors of Production
What are the Factors of Production:
- Factors of production are resources that are thought to be the basic building blocks of production in any economy.
- Land, labour, capital, and entrepreneur are widely considered to be the four main factors of production.
- Land includes any natural resource used to produce goods and services; anything that comes from the land.
- Some common land or natural resources are water, oil, copper, natural gas, coal, and forests.
- Land resources are the raw materials in the production process.
- These resources can be renewable, such as forests, or non-renewable such as oil or natural gas.
- While land is an essential component of most ventures, its importance can diminish or increase based on industry.
- The income that comes from using land and its natural resources is referred to as rent.
- Labor is the effort that people contribute to the production of goods and services.
- Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school.
- If you have ever been paid for a job, you have contributed labor resources to the production of goods or services.
- Labor by an uneducated and untrained worker is typically paid at low prices.
- Skilled and trained workers are called “human capital” and are paid higher wages because they bring more than their physical capacity to the task.
- The income that comes from labour is referred to as
- Think of capital as the machinery, tools and buildings humans use to produce goods and services.
- Capital differs based on the worker and the type of work being done.
- For example, a doctor may use a stethoscope and an examination room to provide medical services.
- Your teacher may use textbooks, desks, and a whiteboard to produce education services.
- It is important to distinguish personal and private capital in factors of production.
- A personal vehicle used to transport family is not considered a capital good, but a commercial vehicle used expressly for official purposes is.
- During an economic contraction or when they suffer losses, companies cut back on capital expenditure to ensure profits.
- The income that comes from capital is referred to as interest.
- An entrepreneur is a person who combines the other factors of production – land, labor, and capital – to earn a profit.
- The most successful entrepreneurs are innovators who find new ways to produce goods and services or who develop new goods and services to bring to market.
- Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist.
- Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely.
- The income that entrepreneurs earn is called profit.
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