Factors of Production: The 4 Types and Who Owns Them

factors of production
Labor is the farmer. Capital equipment is the tractor. Land is his farm. Entrepreneurship is his business, that he's passing onto his daughter. Photo: MECKY/Getty Images

Definition: The four factors of production are land, labor, capital goods, and entrepreneurship. They are the inputs needed for supply. They produce all the goods and services in an economy. That's measured by gross domestic product

Land as a Factor of Production

Land is short for all the natural resources available to create supply. It includes raw land and anything that comes from the land. It can be a non-renewable resource.

That includes commodities such as oil and gold. It can also be a renewable resource, such as timber. Once man changes it from its original condition, it becomes a capital good. For example, oil is a natural resource, but gasoline is a capital good. Farmland is a natural resource, but a shopping center is a capital good.

The income earned by owners of land and other resources is called rent.

The United States is blessed with an abundance of easily accessible natural resource. This includes fertile land and water. Many countries are covered with mountains or desert, making it expensive to use the natural resources. It has miles of coastline,  lots of oil, and a  moderate climate. That's an advantage over Canada. It has similar natural resources but they are frozen for most of the year. 

Labor as a Factor of Production

Labor is the work done by people. The value of labor depends on workers' education, skills, and motivation.

It also depends on productivity. That measures how much each hour of worker time produces in output. 

The reward or income for labor is wages. 

The United States has a large, skilled, and mobile labor force that responds quickly to changing business needs. It also benefits from productivity increases due to technological innovations.

 On the other hand, the U.S. labor force faces increasing competition from other countries. That's one reason why American jobs are being outsourced.

The Bureau of Labor Statistics measures the U.S. labor force. It includes the employed and the unemployed.The employed only include people over 16 who worked in the past week. It excludes the active military and any residents of an institution  they must be members of the U.S. civilian noninstitutional population. The unemployed are those who actively looked for a job in the past month. All the other jobless are not members of the labor force. Here's the Current U.S. Jobs Report.

Capital as a Factor of Production

Capital is short for capital goods.These are man-made objects like machinery, equipment, and chemicals, that are used in production. That's what differentiates them from consumer goods. For example, capital goods include industrial and commercial buildings, but not private housing. A commercial aircraft is a capital good but a private jet is not. 

The income earned by owners of capital goods is called interest.

The United States is a technological innovator in creating capital goods, from airplanes to robots. That's why Silicon Valley is a critical comparative advantage in the global market.

The U.S. Bureau of Economic Analysis measures capital goods production with the monthly Durable Goods Orders Report. It reports on total capital goods order, shipments, and inventory. It also strips out defense and transportation. Those orders typically come in large batches. It can hide the true trends. Capital goods production has declined since the Great Recession. That's because demand hasn't returned to the same levels. As a result, companies aren't investing in new equipment. They are buying back stock shares, purchasing new companies, and looking for opportunities overseas.

Entrepreneurship as a Factor of Production 

Entrepreneurship is the drive to develop an idea into a business. An entrepreneur combines the other three factors of production to add to supply. The most successful are innovative risk-takers.

 

The income entrepreneurs earn is profits.

The majority of entrepreneurs in the United States own small businesses. That's 5.8 million out of six million companies. They create 65 percent of all new jobs. On reason small businesses do so well it's relatively easy to get funded compared to other countries. Others raise money on the stock market by issuing an initial public offering. Shares in these companies are called small cap stocks

Who Owns the Factors of Production

Ownership of the factors of production depends on the type of economic system and society. 

Factors of Production  SocialismCapitalism Communism
Are owned byEveryoneIndividualsEveryone
Are valued for  Usefulness to people  ProfitUsefulness to people

Are There Five Factors of Production?

Capital finance is sometimes called the fifth factor of production. But that's not accurate. Money facilitates production by providing income to the owners of production. (Source: "," The Federal Reserve Bank of St. Louis.)

Factors of Production FAQ