Next video:
Loading the player...

Factors of production is an economic term describing the general inputs used to produce goods and services to make a profit. Under the classical view of economics, the factors of production consist of land, labor, capital, and entrepreneurship.

Land refers to the land itself, as well as the raw materials that come from the land.  This includes timber, coal, precious minerals such as gold, and water.  It can also mean the physical area on which a factory sits.

Labor refers to the workers who answer the phones, lift the pallets, drive the trucks, push the paperwork and do all things physical and intellectual to keep a business running.

Capital refers to the buildings, machines and tools used in the process of production. Capital is anything from a fleet of delivery trucks, to a factory building, to a printing press or a computer. 

Intellectual capital is defined as the technological expertise a business acquires over time – its trade secrets and unique business processes.  There is also social capital - the ability to operate because society has agreed to a system of order, conduct and law.  These elements facilitate an economic environment that allows the business to operate.

Finally, entrepreneurship is the factor of production that ties the other three together. The entrepreneur provides innovation and creativity in the use of the other factors, which helps create a profitable business.

For simplicity and analytic purposes, economists and analysts usually focus attention to two main factors - capital and labor. The relationship of both these factors and a company's output is referred to as the production function. 

 

Related Articles
  1. Investing

    There Are More Ways To Invest In Land Than You Think

    You don't have to have a huge amount of capital to invest in land. You have many other options, including land-related ETFs and ETNs.
  2. Investing

    Top 4 Things That Determine a Home's Value

    Your house depreciates over time, while the land beneath it is likely to do the opposite.
  3. 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.
  4. Small Business

    The 4 Best Online Entrepreneurship Programs

    Learn about some of the pre-eminent graduate-level entrepreneurship programs available online, and decide which program best fits your needs.
  5. Small Business

    The Real Risks Of Entrepreneurship

    Here are some ways you can try to reduce the risks associated with being an entrepreneur.
  6. Managing Wealth

    The Top 5 States Where Retirees Can Buy Cheap Land

    Buying vacant land for future gain is high-risk. Look for low prices in undeveloped areas likely to see a building boom in the near future. Here are five.
  7. 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.
  8. Insights

    One Reason Jobs Shrink: Superstar Companies

    Are superstar companies that dominate their industries but employ relatively few workers to blame for labor’s falling share of GDP?
  9. Investing

    Vanguard: 3 Questions to Ask Clients Interested in Factor ETF Investing

    With factor ETFs growing in popularity, Vanguard said advisors have to work to determine the best ones for clients.
Hot Definitions
  1. Bubble

    1. An economic cycle characterized by rapid expansion followed by a contraction. 2. A surge in equity prices, often more ...
  2. Swap

    A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, ...
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  6. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
Trading Center