Factors of Production

Factors of production are the resources used to provide a service or good to market. Typically, speaking these three factors are land, labor, and capital. Without the factors of production it is not possible for an entrepreneur, also know as a businessperson, to complete business related activities. All businesses need the factors of production.

Land is the first factor of production. To make a successful business it is required that land is secured for several reasons. First, land is needed to locate your business operations. More importantly, land is needed to develop natural resources. It is impossible for the farmer to grow apples without land; whereas it is similarly impossible for the barber to service his or her customers without a shop. Land is the first necessity required to satisfy the factors for production.

Labor is work. All business ventures require some type of labor to produce goods or services. To define labor in other words, it is the effort put forth by a worker for which that employee gets paid. For example, the farmer works his fields to produce an increased yield of apples. The barber uses his or her effort to cut the customers' hair. All effort used to produce goods or services is called labor.

Businesses require the use of capital. Most often the term capital relates to money for investment, but in the pure economics sense, capital is also the machinery used to produce goods or services. Money can be used to purchase items to streamline business operations. Furthermore, machinery already owned is valuable and similarly considered capital. The farmer needs money capital to buy seeds and the farmer needs machinery capital to plow the fields. Both examples used here are capital.

There are two types of capital used in an economic system. First, economists use the term physical capital to describe machines or other objects created by humans to increase production. On the other hand, economists will refer to another type of capital called human capital. Human resources are an integral part of the economic system. Some humans are inexperienced while others have extensive educational backgrounds. Entrepreneurs have to make economic decisions about their labor force and consider the value of their human capital. To put it simply, human capital describes the levels of experience, education, intuition, and et cetera in relation to a given labor force. Typically speaking, the more valuable you are as human capital, the more money you are paid.