Factors of production

This term refers to inputs or resources; these terms are used interchangeably in this text. They refer to anything used in the production and distribution of goods and services. When economists use the term factors of production they usually classify them into three, or sometimes four, categories: land, labour and capital. Entrepreneurship is sometimes added as a fourth factor. These terms are not self-explanatory so each is now discussed in turn.

a. Land

Land is really a combination of two different factors. First, there is the area of land that is needed to produce the good. This may be agricultural land, factory area, shop space, warehouse space or office space. Second, land relates to all natural resources, that is anything that comes from the surface of the land, underneath it or on top of it. Thus we include minerals, crops, wood, and even water and air, though it may seem strange to refer to these as land.

b. Labour

Labour is the easiest of the factors to understand, the input of labour being measured in number of workers, or more precisely, in number of hours worked. Of course, labour is not homogeneous and manual labour is often divided into unskilled, semi-skilled and skilled categories. Labour also includes administrative and managerial workers, though some empirical studies have omitted this important input.1 In practice we may wish to distinguish between these different categories of labour, especially if we want to evaluate their different contributions to output, as will be seen.

c. Capital

This term can again be confusing to students. It does not refer to money, or to capital market instruments; rather it refers to capital goods, that is plant and machinery. Like labour, this is a highly heterogeneous category, and in practice we might want to distinguish between different types of capital, again especially if we want to evaluate their different contributions to output. For example, we may want to classify personal computers, photocopying machines, printers, fax machines and coffee machines separately.

d. Entrepreneurship

Entrepreneurship refers to the ability to identify and exploit market opportunities. It therefore includes two separate functions. This input is often not considered in economic analysis; it is really more relevant in long-run situations, and it is notoriously difficult to measure. For one thing it is difficult to separate entrepreneurship from management; top management should be concerned with both the functions of entrepreneurship, if they are truly representing the interests of shareholders.

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