Key Takeaways
- The four factors of production that a business needs to produce goods and services are land, labor, capital, and entrepreneurship.
- Land also includes any natural resource that comes with it such as minerals, precious metals, timber, and crude oil.
- Labor refers to the skills and efforts used to produce goods and services.
- Capital involves assets that are man-made.
- Entrepreneurship combines all other resources and determines how each will be used in production.
Introduction to Factors of Production
For your business to succeed and achieve its mission, it needs to have an adequate amount of resources at its disposal. These resources are what your business will use to run its operations and sustain itself over a long period of time. Without the necessary resources, your business will eventually cease to exist.
Factors of Production is an economic concept that refers to the inputs or resources needed by a business to produce goods and services. The four factors of production are land, labor, capital, and entrepreneurship.
Having a basic understanding of the economic concept of factors of production could help you determine and acquire the necessary resources that your business needs to produce and deliver its products.
The four factors of production – land, labor, capital, and entrepreneurship – are the key ingredients your business needs to support its economic activities. It’s important for a business to make sure that these inputs lead to the efficient production of outputs, i.e. goods and services.
Land
Land, and any natural resource that comes with it such as gold, water, timber, crude oil, and mineral deposits, are one of the most important resources to many businesses. It may be classified into agricultural lands, commercial real estate, and land used for mining and oil extraction.
The importance of land depends on the core operations of a business. If your business produces livestock, poultry or crops, then you’ll probably be investing more in agricultural land. If your business is to rent out office, co-working or retail spaces, your business will probably lean more towards acquiring commercial real estate.
An online business that operates remotely doesn’t need as much land as what a real estate business usually requires. Since most of their operations exist online, these businesses would only need land for their office. In fact, some large technology companies like Apple and Amazon started out in their founders’ humble garages, without needing to invest in swaths of land. All they needed at that time was an internet connection and a computer to begin with.
Probably the equivalent of land rental for an online business is the rental or use of server space from a company that hosts e-commerce websites or software applications.
Labor
Labor refers to the skills and physical efforts of paid human resources. An example of physical labor is the manual work done by a construction worker, aircraft mechanic and truck driver that involves the use of hands and physical strength. Mental labor, on the other hand, includes intellectual skills and expertise such as those used by accountants and lawyers.
Throughout history, there have been several shifts in the labor demands of businesses as a result of technological advancements. The Industrial Revolution shifted jobs away from cottage industries into factories that utilize machinery for mass production. Similarly, the Digital Revolution has shifted labor demands from manual to computer-based work. Furthermore, the internet has made it possible for companies to outsource jobs to countries with cheap labor.
Capital
Capital includes all assets that are man-made such as tools, machinery and buildings that are used to produce goods and services. Money is not considered capital because it is not directly involved in the production of goods and services. However, it is used to acquire land and capital, and to pay for labor.
Aside from physical assets, capital also includes intellectual assets such as trademarks, software, patents, copyright, and franchises. These intangible assets are also used for the production of goods and services.
A common example of a capital-intensive business is a manufacturing business where factories, heavy equipment and assembly lines are utilized to produce physical goods. Businesses that rely less on capital and more on labor are usually service-based such as a plumbing business.
Entrepreneurship
The entrepreneur is the one who combines the above factors of production and determine how each will be organized and used in the production of goods and services. The work of an entrepreneur is vital to the growth of the business in its early stages. Every successful entrepreneur has been able to identify an existing problem or need and create profitable solutions for them.
An entrepreneur assumes the risks and rewards that come as a result of owning a business. Initially, the entrepreneur invests most of their time and efforts in building the business. But as the business grows, the entrepreneur would begin to utilize more capital, hire managers and employ additional workforce to scale up the business.
Many highly successful companies were built by great entrepreneurs. Some examples are Apple, Microsoft, Starbucks, Facebook, Alibaba, Tesla, Amazon, Google, and McDonald’s. The entrepreneurs behind these companies are great innovators who challenged the status quo and succeeded against all odds.
Review Questions
- What are the four categories of inputs that a business needs to produce goods and services?
- Why is entrepreneurship very important in a business?
- What is the effect of the Industrial Revolution on jobs?
- Among the four factors of production, where do gold, timber and other natural resources belong?
- What is a factor of production that involves man-made tools and intellectual assets for the production of goods and services?
