Factors of Production: Definition, 4 Types, Who Owns

The traditional division of factors of pro­duction distinguishes labour, land and capital, with a fourth factor, enterprise, some-times separated from the rest. Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor.

Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school. It includes an artist’s creation of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid for a job, you have contributed labor resources to the production of goods or services.

You need supplies, equipment, resources, and some know-how, too. How much you have of these things can affect your production. In economics, a production function is a way of calculating what comes out of production to what has gone into it.

Definition of Production:

For example, in a capitalist economy, the factors of production are owned by individuals who use them for their own profit. This table shows who owns the factors of production in four of the most important economic systems, and what these factors are valued for in each system.

The income that resource owners earn in return for land resources is called rent. The producer secures the best combination by applying the principles of equi-marginal returns and substitution.

This includes not just land, but anything that comes from the land. Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the production process. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas.

These are man-made goods used in the production of other goods. Their use in commercial production is what separates them from more widely used consumer goods.

Typically, this change in TFP is the result of an improvement in efficiency or technology. The Greek characters alpha and beta reflect the output elasticity of the inputs. Output elasticity is the change in the output that results from a change in either labor or physical capital. Our understanding of the concept of factors of production is rooted for the most part in neoclassical economics. Other strains of economic theory also contribute to our current understanding, including socialism’s view of labor as one of the factors.

Boundless Economics

The Cobb-Douglas production function represents the relationship between two or more inputs – typically physical capital and labor – and the number of outputs that can be produced. It’s a commonly used function in macroeconomics and forecast production. The four factors of production are inputs used in various combinations for the production of goods and services to make an economic profit. The factors of production are land, labor, capital, and entrepreneurship. In this formula, Q is the quantity produced from the inputs L and K.

Modern, mainstream/neoclassical economists typically consider capital to be the main source of value, in contrast to economists of the past, who described land or labor as such. They are artificial entities created by individuals for the purpose of organising and facilitating production. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common. The addition of the labor of the second worker results in two more units per hour, or a marginal product of two. Because the marginal product is directly related to the increase in labor, this is also called the marginal product of labor.

How does production department work?

A production department is a group of functions within a business that is responsible for the manufacture of goods.

L is the amount of labor expended, which is typically expressed in hours. K represents the amount of physical capital input, such as the number of hours for a particular machine, operation, or perhaps factory. A, which appears as a lower case b in some versions of this formula, represents the total factor productivity (TFP) that measures the change in output that isn’t the result of the inputs.

  • An entrepreneur is a person who combines the other factors of production – land, labor, and capital – to earn a profit.
  • The most successful entrepreneurs are innovators who find new ways produce goods and services or who develop new goods and services to bring to market.

When firms are deciding how much to produce they typically find that at high levels of production, their marginal costs begin increasing. This is also known as diminishing returns to scale – increasing the quantity of inputs creates a less-than-proportional increase in the quantity of output. If it weren’t for diminishing returns to scale, supply could expand without limits without increasing the price of a good.


In economics, a production function relates physical output of a production process to physical inputs or factors of production. It is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs – generally capital and labor. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs. Factors of production is an economic term that describes the inputs used in the production of goods or services in order to make an economic profit.

The formula attempts to calculate the maximum amount of output you can get from a certain number of inputs. It’s time to wrap things up, but before we go, always remember that the four factors of production – land, labor, capital, and entrepreneurship – are scarce resources that form the building blocks of the economy. Labor is the effort that people contribute to the production of goods and services.

production departement

Influential political economists like David Ricardo, Karl Marx, and Adam Smith initially labeled land, labor, and capital as the factors of production. In fact, the resources of any community, referred to as its factors of production, can be classified in a number of ways, but it is common to group them according to certain characteristics which they possess.

Had the increase in output been a result of new technology or physical capital, the change would be marginal product of capital. Or, as the economists say, ceteris parabis, which means ‘all other things equal.’ Marginal product is measured in physical units, which is why it is also called marginal physical product. The first factor of production is land, but this includes any natural resource used to produce goods and services.

The income earned by labor resources is called wages and is the largest source of income for most people. Financial capital is money, credit, and so forth that helps to build wealth.

These include any resource needed for the creation of a good or service. The factors of production include land, labor, capital, and entrepreneurship.

This scarcity of resources means that producing some goods and services leaves other goods and services unproduced. A production function relates the input of factors of production to the output of goods. In the basic production function inputs are typically capital and labor, though more expansive and complex production functions may include other variables such as land or natural resources. Cars, clothing, sandwiches, and toys are all examples of output.

An entrepreneur is a person who combines the other factors of production – land, labor, and capital – to earn a profit. The most successful entrepreneurs are innovators who find new ways produce goods and services or who develop new goods and services to bring to market. Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood.

The land and water used to grow the cotton is limited and could have been used to grow a variety of different crops. The workers who cut and sewed the denim in the factory are limited labor resources who could have been producing other goods or services in the economy. The machines and the factory used to produce the jeans are limited capital resources that could have been used to produce other goods.

According to the principle of equi-marginal returns, any producer can have maximum production only when the marginal returns of all the factors of production are equal to one another. For instance, when the marginal product of the land is equal to that of labour, capital and organisation, the production becomes maximum. Sometimes the type of economic system decides the ownership of the factors of production.

Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely. Marginal product is the change in the output that results from one additional unit of a single production factor with all other factors held constant. Returns to scale measures the change in output that results from a proportional change to the inputs. Remember, goods and services are scarce because the factors of production used to produce them are scarce. In case you have forgotten, scarcity is described as limited quantities of resources to meet unlimited wants.

How to Borrow Money with Loans

It is used by individuals to create retirement portfolios, invest, make down payments on homeownership, and so forth, and by businesses to gain greater revenue. Some people describe capital finance as the fifth factor of production, but it’s not actually a factor of production. Rather, it helps to make production possible as the owners of production receive income. Here capital refers not to money (which is not a factor of production), as you might expect, but to manufactured resources such as factories and machines.