Factors of Production

In ordinary terms, production is the act of manufacturing a final product. But from an economic point of view, it exists as a combination of processed involved in generating goods and/or services, we call it “factors of production”. Each factors is distinct and separate from one another but they all play an important role in the production process.

Don’t be misled by the word, because “land” refers to all natural resources, and other extraditable reserves (gas, coal, oil), as well as trees and animals. It includes not just what is on the surface but also above and below the earth. In spite of its “limitations,” a country’s “richness” is oftentimes determined by its natural resources. Consequently, the productivity of a piece of land depends on several factors: fertility, improvements and/or developments, location (geography, population and market) and climate. As a resource, it is scarce and passive, which means that it must be cultivated and tilled. However, only land can produce something of value on its own. Its importance can’t be reiterated enough – one cannot establish any business without it and everything we use comes from it.

All human efforts that result in the creation of a product or service in exchange for a wage or salary are referred to as labour. It encompasses both the physical and mental tasks involved in production. One significant characteristic of labour is that it is inseparable from the worker. As such, its quality is highly dependent on the worker’s skills, education and training. People differ from the other resources as they are independent, with free will and subject to physical exhaustion. Additionally, land, capital and entrepreneurship rely on labour in order to be of value, which in turn gives labourers the bargaining power to demand better working conditions and higher wages.

We almost always associate capital with money but it also includes factory, property and equipment. However not all financial wealth is capital – only the amount utilized for further production is considered capital. It is used to pay wages, purchase raw materials and machinery and improve the land, thereby enhancing the productivity of land and labour. Unlike land, capital loses its value over time and is subject to wear and tear.

The classical theory only recognizes land, labour and capital as the main factors of production. However, Alfred Marshall introduced a fourth component, entrepreneurship (organization/enterprise). Originally, it was defined as the process of buying and selling at uncertain prices. Over time, it has evolved into a coordinated element that combines, manages or brings together the other factors, i.e., money, raw materials, skilled labour, land and buildings – needed to create goods and/or services.

Every business must have all of these elements in order to complete the manufacturing process. However, having all these factors is not enough on its own. A balance must be created in order to attain optimal production and efficiency.


Z. Ricafrente | DBPC Blog