Factors of Production
The various elements used to produce goods and services are considered the factors of production. There are four main factors of production that go into the process:
- Land: this includes raw materials that are produced from agricultural endeavors, fishing, and mining.
- Capital: items created to aid the production process including computers, factories, and machinery.
- Labor: Physical workers involved in producing the actual goods.
- Entrepreneur: individuals or businesses who engage in setting up a business to employ various factors of production such as labor and capital.
Various Other Possible Factors of Production
- Human Capital (knowledge): workers’ skills and abilities. One example is a doctor who spends years studying medicine.
- State of Technological Development: the current state of technological advancements influences how effective capital investments can become.
- Social Capital: Entrepreneurs will be more confident to undertake business adventures when there is societal trust and cohesiveness.
- Cultural Heritage: Former business models are easier to replicate where there have been strong traditions of investment in some model in a particular locality.
Factors of Production Examples
Examples of Land/Raw Materials
- Produce (fruits, vegetables, meat)
- Land for building factories (commercial real estate)
Human Resources (Labor)
- Human workforce (includes full and part-time, permanent, and temporary workers)
Man-Made Resources (Capital)
- Tractors and farming equipment
- Office blocks
- Assembly lines/ factories
- Publically accessed infrastructure (roads, communication, transporting goods)
Entrepreneurs ( People responsible for bringing together the factors of production)
- Self-employed individuals
- Start-up Business (Jack Dorsey, Anita Roddick)
- Finance – Start ups require funding, either from their own savings, loans from private backers or larger financial institutions
Examples of combining Factors of Production
An entrepreneur buys the land needed to produce tea. It’s important to select land in the right regions to encourage the growth of tea plants. The company will then need to employ workers who can cultivate and care for the tea and those who can harvest tea leaves. The entrepreneur will invest capital into the project through the purchase of farming tools, harvesting tools, baskets, and vehicles for delivering harvested crops to the market. This industry is considered “labor-intensive” since a large portion of the funds is used for labor.
Example: Processed Foods
The entrepreneur will need to acquire land for the factory. A significant amount of capital will be needed for machinery and tools needed to combine raw ingredients to create the final food products. Larger factories will also need an adequate workforce to operate machines needed for production. This type of industry is complex and requires technological innovations and workers who can perform a variety of tasks. This industry is considered to be “capital-intensive” because of the large percentage of costs.
Example: New Technology
Industries that work with new tech like software development companies will need human capital. They’ll need to invest in people with specific skills and those who have the experience, expertise, education, and skills to develop technology. However, in this industry, purchasing land is not always necessary as workers can often work from home.
The Factors of Production and Diminishing Returns
Looking at economics on a basic level, it is assumed there are two primary types of factors of production a firm must consider. These are capital and labor. When a firm hires more labor but the capital is fixed, eventually the firm will experience diminishing returns. In other words, at some point, hiring more workers doesn’t increase output and returns are diminished.