Factors of production are inputs used to produce an output, or goods and services. They are resources a company requires to attempt to generate a profit by producing goods and services. Factors of production are divided into four categories: land, labor, capital and entrepreneurship.

Factors of Production

Land is the natural resource that an enterprise uses to produce goods and services to generate a profit. Land is not just restricted to the physical property or real estate. It includes any natural resources the land produces, such as crude oil, coal, water, gold or natural gas. The resources are natural materials that are included in the production of goods and services.

Labor is the amount of work laborers and workers perform that contributes to the production process. For example, if a laborer works and her efforts create a good or service, she contributes to labor resources.

Capital is any tool, building or machine used to produce goods or services. Capital varies throughout each industry. For example, a computer scientist uses a computer to create a program; his capital is the computer he uses. On the other hand, a chef uses pots and pans to deliver a good and service, so the pots and pans are the chef's capital.

Entrepreneurship combines these factors of production to earn a profit. For example, an entrepreneur brings together gold, labor and machinery to produce jewelry. The entrepreneur takes on all the risks and rewards that come with producing a good or service.

Economic Schools of Thought on Factors of Production

Most economic schools identify the same types of factors of production: land, labor, capital and entrepreneurship (intellectual capital and risk-taking). Monetarist, neoclassical and Keynesian schools of thought are mostly in agreement about who should own the factors of production and their roles in economic growth. Marxist and neo-socialist schools argue that the factors of production should be nationalized and that growth primarily comes from labor capital. The Austrian school is perhaps the most capital-intensive school, suggesting that the structure of the factors of production determines the business cycle.

The chief debate between capitalism and socialism is about the ownership of the primary factors of production. Capitalists believe that private ownership is a necessary condition for competition, innovation, and sustained economic growth. Socialists and Marxists argue that accumulated private capital leads to unchecked wealth disparity and the concentration of power in the hands of a few business interests.

Austrians contend the factors of production need to be viewed as heterogeneous and time-sensitive. They argue that normal Keynesian and neoclassical models are fundamentally flawed because they aggregate all production capital into senseless snapshots. For example, the standard notion of gross domestic product (GDP) treats all investment as equal and treats all capital goods sales as equal.

The Austrian method stresses that it makes a real difference whether producers build houses or lay down railroad tracks. When a ton of steel is used towards a sustainable end, it should be treated as more valuable than when it is wasted during a housing bubble, for example. Mistakes made with capital goods are more difficult to correct and lead to more serious long-term consequences. This is referred to as the heterogeneity of capital. Since capital goods investment and usage is closely tied to the interest rate, Austrians oppose even nominal interest rate controls of central banks.

  1. Why are the factors of production important to economic growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  2. How does the neoclassical growth theory predict real GDP?

    Understand what neoclassical growth theory is and how the ideology come about. Learn how the neoclassical growth theory predict ... Read Answer >>
  3. What are key economic growth rates that can be used to determine the economic health ...

    Discover the indicators that correlate with real economic health, and learn why many traditional metrics do not function ... Read Answer >>
  4. How is an economy formed and why does it grow?

    Find out how an economy forms and why it grows, including the role that financial markets play and how productivity increases ... Read Answer >>
  5. Why is productivity an important concept in economics?

    See why the concept of productivity is so crucial to understanding economic growth, and why a standard of living directly ... Read Answer >>
  6. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade and how it is used as an economic indicator. Read Answer >>
Related Articles
  1. Financial Advisor

    Is Private School for Your Child a Good Value?

    Parents want their kids to get a good education, but whether or not private school is worth it depends on more than just the cost.
  2. Financial Advisor

    Insider's Guide To The Top U.S. Business Schools

    The best business school for you depends on your skills, career goals and interests. We help future MBA's make a more informed choice.
  3. Personal Finance

    5 Top Business Schools in America

    These schools produce many of the most successful business grads and offer some of the best education in business and management.
  4. Investing

    Uncover The Next Real Estate Hot Spot

    Real estate land speculation is a way to get in on a hot investment before a boom hits.
  5. Insights

    What Causes Bubbles?

    A look at how asset bubbles are formed according to different schools of thought.
  6. Investing

    Natural Resource Investing

    ETFs and futures are just some of the various investment options available to natural resource investors.
  7. Financial Advisor

    Why Advisors Should Consider Natural Resource ETFs

    Natural resource investments, such as ETFs, can be an attractive long-term addition to a client's portfolio.
  8. Investing

    Capital Markets: Where They Matter Most

    See which countries and regions dominate the world's capital markets and why American entrepreneurial spirit and risk-taking give the United States an edge.
  9. Investing

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
  1. Labor Productivity

    A measurement of economic growth of a country. Labor productivity ...
  2. Land

    Land is property or real estate, minus buildings and equipment, ...
  3. Neoclassical Growth Theory

    The neoclassical growth theory is an economic concept where equilibrium ...
  4. London Business School

    A school of international business in London. The London Business ...
  5. Capital Intensive

    A business process or an industry that requires large amounts ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small ...
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center