Factors of Production

The factors of production is an economic term which describes all inputs used to produce goods and services. Most economists group the factors of production under four broad categories:

Land

Land is a factor of production that refers to all natural resources used in the production of goods and services. This includes all agricultural and non-agricultural land, the sea, oceans and rivers, animals, and raw natural resources such as oil or coal. Land is a passive factor of production in that it is not actively involved in the production process, but rather provides the raw materials or resources that are necessary for production to take place.

Labour

Labour refers to all human effort used in the production of goods and services. This includes both physical and mental work, such as the labour of a teacher or factory worker. The concept of labour is an important factor of production because it represents the human input that is required to transform raw materials into finished goods and services.

Capital

Capital goods are human-made goods that are used in the production of other goods and services. These goods are also known as physical capital or simply capital. Capital goods include factories, machinery, tools, offices, and computers. Capital goods are distinct from consumer goods, which are goods that are directly consumed by individuals or households rather than used in the production of other goods.

Enterprise

Enterprise refers to the willingness and ability to take business risks and make business decisions. Entrepreneurs are individuals who organize the other factors of production (land, labor, and capital) to produce goods and services for consumers and bear the risk of success or failure in a business. Enterprise is an essential factor of production because it drives innovation and allows for the creation of new products and services. Without entrepreneurship, the economy would not be able to adapt to changing consumer preferences and market conditions.

Now that you’ve read this article, test your knowledge with a quiz!

10 Questions

You may wish to review your knowledge of the factors of production before you begin.

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Page 1 of 10

On which factor of production does innovation directly depend? A. Decisions of entrepreneurs B. High inputs of capital C. Long hours of manual labour D. Plentiful supplies of land

Page 2 of 10

Which combination of a factor of production and its factor income is not correct? A. Capital -> Interest B. Enterprise -> Profit C. Labour -> Dividends D. Land -> Rent

Page 3 of 10

What is the key role of an entrepreneur? A. Inventor B. Risk taker C. Shareholder D. Worker

Page 4 of 10

What could cause an increase in demand for a factor of production? A. Decrease in the efficiency of the factor of production B. Decrease in the price of an alternative factor of production C. Increase in the demand for the good or service produced D. Increase in the price of the factor of production

Page 5 of 10

Which statement about the factors of production is correct? A. Capital is a financial resource and includes savings in banks B. Enterprise is limited in supply and includes office workers C. Labour is a human resource and includes pensioners and children D. Land is a natural resource and includes trees and fish

Page 6 of 10

What is not a factor of production? A. $20 banknote B. An office C. A photocopier D. A secretary

Page 7 of 10

What would an economist regard as an example of the factor of production capital? A. An individual’s purchase of stocks and shares B. Borrowing by a firm to pay for electricity C. The building by a firm of a new factory D. Total savings by individuals in a country

Page 8 of 10

A government wishes to increase agricultural output. It gives farmers the tools to irrigate the farmers’ fields. Which factors of production are provided by the farmers? A. Capital and enterprise B. Enterprise and labour C. Labour and land D. Land and capital

Page 9 of 10

What would be classified by an economist as the factor of production known as land? A. A discovery of oil in the South China sea B. An oil rig bought by an oil company C. Money held by the oil companies in their bank accounts D. The productivity of oil workers

Page 10 of 10

Which example of a factor of production in the fishing industry is correct? A. Capital -> Charges on loan for fishing boat B. Enterprise -> Salaries of fish warehouse managers C. Labour -> Profits of fish shop owners D. Land -> Fish in the sea

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Luke Watson

Luke Watson has a BSc (Hons) in international business and economics. He is currently working as an IBDP economics teacher at Shanghai United International School in China.

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