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What is Factors of Production?

by Puja

Production of a commodity requires the use of certain factors of production. Factors of production transforms those resources into different goods or services which is available to the end user.

Classification of factors of production

 1. Land and natural resources
  • In economics land refers to natural resources or gift from nature
  •  Definition
    • In economics land is taken to mean not simply that part of the earth’s surface not covered by water, but also all the free gifts of nature’s such as minerals, soil fertility, as also the resources of sea. Land provides both space and specific resources”.
  •  land can be residential, commercial, recreation, cultivation, extraction, uninhabitable


  • Fixed supply – firstly, the total area of earth is fix. The supply of land is limited. Thus the price of land and natural resources tends to be sensitive to changes in consumer demand. However, in today’s context land price is increasing sharply
  • Alternative uses – since the total supply of land is fixed, land has alternative uses. In addition the land can be used for constructing factories, building, or to grow wheat, vegetables, etc. the same land is used for many purposes
  • No cost of production – land has no cost of production as it is the gift of nature. Therefore, from the society point of view the reward from land is the rent (surplus income). But today much of the services of land require expenditure to maintain them.
  • Differences in fertility – land are not equally productive. It is not homogenous in nature. Some lands are more fertile than others
  • Immobility – the land and natural resources cannot be moved. Immobility fixed in nature
2. Labour
  • Firstly, labour is an important factors of production. All human efforts that help in production is labor. The effort of labor is physical or mental which is used for the production of goods are services
  • Definition
    • According to Marshall, “Any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work is called labor.” 


  • Labour cannot be separated from labourer – firstly, labour and the labourer go together. When a commodity is sold seller does not go with it. On the other hand when the labours supply his services he goes with it.
  • Labor service is not transferable – when a person takes the task , he cannot transfer his service to someone else to do the task, while he does something else
  • Labour is perishable- if the labour is not able to sell his service today, then he will not get the value for that day because labour has weak bargaining power
3. Capital
  • Capital is one of the important factors of production as without the involvement of capital, production cannot take place.
  •  Definition
    • ‘Produced means of production.’
  • Capital refers to manmade resources used in the production process
  • Tools and machinery, bullocks and ploughs, seeds and fertilizers, etc. are examples of capital.
  • Capital three types fixed, working and venture


  • Capital formation – capital goods are the creator of other goods. Capital goods like machinery used to produce goods with less effort and lower cost. We have to first produce capital goods to use them. This calls for a sacrifice of current consumption.
  • Mobility – capital is mobile in both geographically and occupationally. For example, electric motor cab move from one place to another.
4. Enterprise
  •  The enterprise brings land, labour and capital together at one place and uses them for the production process.
  • The person who creates enterprise is entrepreneur
  • He is the one who decides what, where and how to produce
  • Definition
    • An entrepreneur is a person, who undertakes risks, mobilizes resources, and generates employment by establishing and running an enterprise.


  • Decision maker – firstly, an entrepreneur decides what to produces, secondly, where to produce, how to produces, thirdly, how much to produce, so on. He decides the scale of production and in which proportion to use different factors of production. He should assess the risk and estimate the profitability.
  • Creativity – the ability of an entrepreneur to bring new ways to run a business. Therefore, he should verify the new idea before implementing it.
  • Time management – an entrepreneur can be successful if he manages his time efficiently and effectively

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