Businesses require resources for the production of goods and services. The resources used in the production processes are called factors of production. There are four factors of production available to enterprises: land, labor, capital and enterprise.
Land
Land includes all natural renewable and non-renewable resources used for production, e.g. wood, water, rivers, fish and seafood, diamonds, hydrogen, crude oil, minerals, metal ores, forests and physical land itself (fertile soil).
Labor
Both the physical and mental efforts of people in the production of a good or service. Manual and skilled labor make up workforce of the business. Labor is also called workforce or personnel. Workforce is paid salaries (full-time workers earning salaries are considered as Fixed Cost) or wages (part-time workers earning wages are considered as Variable Cost) for their services in a business. Each worker possesses unique knowledge, personality, skills and experience. Quality of personnel is usually achieved through training and education.
Labor is also considered as the number of people available to work.
Capital
The term ‘capital’ has several meanings in business. First, it is all non-natural, artificial (manufactured) resources used in the production of other products, e.g. tools, machinery, buildings, offices, factories, computers, equipment, vehicles, etc. Second, capital is also finance needed for production of goods and services. Owners of capital receive interest, if others borrow it from them, e.g. leasing a machine, renting an office space or a factory building, etc.
Entrepreneurship / Enterprise
Entrepreneur develops a business idea, hires and organizes the other three factors of production to carry out the business activity. Entrepreneurship is the management, organization and planning of the other factors of production – the skill of combining together all available resources at a given period of time. The success or failure of a business rest on the talents and decisions of the entrepreneur. Entrepreneurs are ready to take the risk of setting up businesses. If a business fails, entrepreneurs may lose some or all of their money and time invested in businesses.
Time is also a precious resource. Should it be considered as one of the factors of production?
To sum up, factors of production are the four types of inputs or resources necessary for the production process – transforming inputs (raw materials, components, machinery, equipment and labor) into outputs (manufactured goods or provided services).
