Factors of Production

Statement

The factors of production are the economic resources used to produce goods and services. There are four:

• Land — all natural resources made available by nature: geographical land together with the renewable (wind, solar) and non-renewable (fossil fuels, mineral ores) resources it carries.
• Labour — human effort, both mental and physical, used in production.
• Capital — assets used to produce other goods: physical capital (factories, machinery and tools) and financial capital (the monetary assets used to buy inputs).
• Entrepreneurship — the function of organising land, labour and capital into production, and bearing the risk of doing so.

Notes

The four factors are finite — they are the concrete form scarcity takes — and their quantity and quality set an economy’s productive capacity. A change in any factor changes what the economy can produce, which is why they underpin potential growth and outward shifts of the PPC and, in macroeconomics, the position of the aggregate supply curve (Theme 3). When a question gives a shock — a fall in population, an earthquake, an inflow of foreign investment — the first analytical step is usually to map it onto one of the four factors.