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. 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.
  3. Small Business

    The Real Risks Of Entrepreneurship

    Here are some ways you can try to reduce the risks associated with being an entrepreneur.
  4. Insights

    What To Do When The Government Wants Your Land

    Find out how the government evaluates your land, what your options are and how to get the most from it.
  5. Insights

    Facebook Helps World Bank Gather Data for Entrepreneurship Report (FB)

    The social media network collaborated with the World Bank and OECD to produce a report detailing the state of entrepreneurship across the world.
  6. 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?
  7. Personal Finance

    Top Business And Finance Degrees For 2013

    The current crop of business students are picking in-demand majors with high salaries and flexible career paths.
  8. Small Business

    Entrepreneurship Is Declining: How to Turn it Around

    A report from the Center for American Progress finds that the rate of business ownership is falling across the board, but especially among non-whites.
  9. Small Business

    Small Business: Speed Up Receivables To Avoid A Cash Crunch

    Waiting for customers to pay can be a losing game. Look to factoring for quicker cash.
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center