Factor of production

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Definition

A factor of production in the creation of a commodity (good or service) is an input that needs to be put in for the creation of the commodity.

Types of factors of production

Traditionally, factors of production have been classified into four categories:

  1. Land, which is intended to cover not just physical land, but also natural resources.
  2. Labor, which is intended to cover the time and effort spent by people.
  3. Capital, which is meant to capture human-created goods such as tools and machines that are used in the production process.
  4. Enterprise or entrepreneurship, which is meant to capture risk-taking ability and the ability to manage an enterprise.

However, the distinctions between these are sometimes blurred:

  • Labor versus capital: For instance, human capital, that refers to the knowledge and skills acquired by workers, and hence influences their work productivity, has conceptual features of both capital and labor. This becomes particularly important in knowledge-intensive economies.
  • Land versus capital: Part of good agricultural practice involves maintaining the fertility of land, much of which involves investment. In this sense, it is unclear whether land made fertile through agricultural investment is to be treated purely as land or as capital. Similarly, many natural resources that need to be extracted from the environment require significant capital investment in their extraction.
  • Labor versus enterprise: The distinction between labor and enterprise is unclear, because a lot of work involves risk-taking, enterprise and managerial skills.