Land, Labour, Capital and Entrepreneurship Explained

What Are Factors of Production?

Factors of production are the resources needed to produce goods and services. There are four main factors: land, labour, capital and entrepreneurship.

Land

Refers to all natural resources - soil, water, minerals, forests. Its reward is rent.

Labour

Human effort (physical or mental) used in production. Its reward is wages/salary.

Capital

Man-made resources used to produce other goods, such as machines, tools and buildings. Its reward is interest.

Entrepreneurship

The skill of organising the other three factors, taking risks, and making business decisions. Its reward is profit.

Why Factors of Production Matter

Every business, from a small farm to a large factory, needs a combination of these four factors to produce goods and services efficiently. Scarcity of these factors is a key reason why societies must make economic choices.