This article is about factors of production and sectors of production. It describes the four different factors of production and three basic sectors of production.
Factors of production
From the Economics perspective, factors of production are categories of resources. These factors are the things used in business to either produce a product or provide a service. The four factors of production are land, labor, capital and enterprise.
1. Land
This does not simply mean the land which you walk upon, but all of the things we use it for and all useful resources that come from it. Subsequently, land includes the land or place where the business factories or offices are located. It also includes natural resources, e.g. coal, oil, diamonds, metals, forests, rivers and soil for farming.
Often these natural resources are divided between two types:
A. Renewable resources: hydro-power (water), solar power (sun power), forests and animals (fish, wild forest animals, birds), etc.
B. Non-renewable resources: diamonds, oil, coal, natural gas, etc. which can never be replaced, etc.
2. Labor
Labor refers to human resources. This factor of production includes factory workers, farmers, office workers, shop workers and even management. These workers are paid a wage (USD$ per hour / week) or a salary (USD$ per month / year). The quality of workers is important to an economy, since better educated workers are more productive and able to generate better ideas and solutions.
3. Capital
Capital refers to the money which owners use to set up or expand a business and invest in other businesses. However, capital also means the tools, machinery and equipment which a business uses. It is also called an artificial resource. It is not natural, which means it is man-made.
4. Enterprise
Enterprise means the businessman, or entrepreneur, who develops the business idea and then organizes the other three factors of production (land, labor and capital), so that a business is created. Entrepreneurs take a ‘risk’ meaning they could become rich, if they are successful. However, they may lose a lot of money, if they fail in their business venture.
Entrepreneurs are very important if an economy is to grow. An economy with many entrepreneurial people is more likely to be successful.
Some argue that an entrepreneur is a part of the labor factor of production because they are a person. However, many argue that without these people to drive an economy, there would be no business, making them a separate entity in factors of production.
Sectors of production
Business activity is often classified by the type of ‘production’ that takes place.
- Primary production includes all business activity which is concerned with taking natural resources from the earth. This involves both the extraction of raw materials and the growing of food. For example, mining (coal, oil, metals), fishing, farming, forestry, etc.
- Secondary production includes all business activity concerned with manufacturing, processing and construction, which transforms raw materials and goods into finished goods. For example, car production, distilling (beer-making, vodka-making), baking (making bread, cakes, cookies, etc.), ship building and building construction, etc.
- Tertiary production includes all business activity concerned with the provision of services. For example, retail, hairdressing, distribution, security, banking, theater and tourism.
In summary, companies use factors of production to conduct business, where they can operate in primary, secondary or tertiary industries.
