Loading the player...

What are 'Factors Of Production'

Factors of production is an economic term that describes the inputs that are used in the production of goods or services in order to make an economic profit. The factors of production include land, labor, capital and entrepreneurship. These production factors are also known as management, machines, materials and labor, and knowledge has recently been talked about as a potential new factor of production.

BREAKING DOWN 'Factors Of Production'

Factors of production include any resource needed for the creation of a good or service. At the core, land, labor, capital and entrepreneurship encompass all of the inputs needed to produce a good or service. Land represents all natural resources, such as timber and gold, used in the production of a good. Labor includes all of the work that laborers and workers perform at all levels of an organization, except for the entrepreneur. The entrepreneur is the individual who takes an idea and attempts to make an economic profit from it by combining all other factors of production. The entrepreneur also takes on all of the risks and rewards of the business. Capital is made up of all of the tools and machinery used to produce a good or service.

An Encompassing Example of the Four Factors of Production

Often times, a good or service uses each one of the four factors of production in the generation of its output. If, for example, a young technology developer senses the need to create a new social media tool, in this case, Facebook. He becomes an entrepreneur when he assumes the risk of the idea's success or failure. Mark Zuckerberg allocates his hour toward this new venture, and by coding the minimum viable product himself, he is the only factor of production.

The product begins to take shape, and the young entrepreneur soon realizes that he needs help building the product, and along with co-founder Eduardo Saverin, goes out to recruit additional employees. He hires two people, an engineer (Dustin Moskovitz) and a spokesperson (Chris Hughes), who both allocate hours to the project, meaning that each one of the hours they invest becomes a factor of production. Zuckerberg also decides that they'll need to rent server space to continue developing the product, and charges 10,000 users $85 a month, and the cash that's invested also becomes a factor of production.

At first, there is no need for land. However, as the business continues to grow, the product becomes very reliant on server space, which is needed to make the product function. Zuckerberg decides to use his own money to increase the rented server space. Eventually, Facebook needs their own data center to meet growing demand, and since the servers are made from silicone and take up warehouse space, and they become the final factor of production.

RELATED TERMS
  1. Factor Income

    Factor income represents the flow of income that is derived from ...
  2. Limited Entrepreneur

    A limited entrepreneur is a person who does not take active management ...
  3. Social Entrepreneur

    A social entrepreneur is a person who pursues an innovative idea ...
  4. Mark Zuckerberg

    Self-taught computer programmer and self-made multi-billionaire ...
  5. Productize

    "Productize" refers to the process of developing or altering ...
  6. Physical Capital

    Physical capital is one of the three main factors of production ...
Related Articles
  1. Small Business

    Why Entrepreneurs Are Important for the Economy

    Entrepreneurship is important to the economy in many ways, but it can potentially have a damaging effect as well if not properly regulated.
  2. Small Business

    Entrepreneurs and Entrepreneurship Defined

    Defining an entrepreneur is difficult, as there is no one-size-fits-all description, and people become entrepreneurs in different ways.
  3. Financial Advisor

    How to Manage Entrepreneurial Risk

    Entrepreneurs face many risks that general employees don't. Understand these entrepreneurial risks and find out how to mitigate some of them.
  4. Investing

    Mark Zuckerberg Success Story: Net Worth, Education and Influence

    Learn about Mark Zuckerberg, the founder and CEO of Facebook. Understand where he came from and what in his life helped him achieve success.
  5. Small Business

    Ready For The Entrepreneurial Leap?

    There are key traits and motivations that characterize an entrepreneur; these aren't necessarily genetic, but can be acquired over time.
  6. Small Business

    Serial Entrepreneurs Venture And Venture Again

    Serial entrepreneurs start up a venture, sell it, and start another one, and they often benefit from their previous experiences.
  7. Investing

    American Tech Titans Face Dying Server Market, Taiwanese Manufacturers Boom

    HPE, Dell and Cisco struggle to boost their server sales as tech customers reduce spending.
  8. Investing

    What's the Real Reason Zuckerberg is Going on a 50-State Tour?

    Meeting people in every state and shaking hands... like someone running for office?
  9. Insights

    Zuckerberg to Lose Facebook Control If He Leaves (FB)

    In order to mitigate "succession risk," Facebook has proposed a provision that would remove its founder's majority voting share if he leaves the company.
RELATED FAQS
  1. What risks does an entrepreneur face?

    Find out if you have what it takes to overcome the challenges and risks associated with starting a business and becoming ... Read Answer >>
  2. Who coined the term "entrepreneur"?

    Entrepreneur is a French word coined by an economist, Jean-Baptiste Say, and usually is translated as "adventurer." Read Answer >>
  3. 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 >>
  4. How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a ... Read Answer >>
  5. 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 >>
  6. Is industrialization good for the economy?

    Find out why industrialization can be considered the most important economic transition in history, dramatically increasing ... Read Answer >>
Trading Center