Factors of Production

Factors of Production

#GS-03 Economy

For Prelims

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.

Source “What are the factors of production?