Factors of Production
People think economics is about dollars and sense. Er, cents. And it is (on both counts).
But economic choices involve more than just money. Money, or income, is just one of several scarce or limited resources we have to decide how to use wisely. Time is also a resource that we must choose how to spend.
Economists traditionally also identify several factors of production that must be constantly prioritized and allocated. Traditionally, these factors of production are identified as land, capital, and labor. Economists define land as all natural resources. Trees, game animals, water, minerals—these are all included in the economic concept of land. Capital includes types of property, such as machinery and tools, that can be used to produce things. It does not include money. Labor refers to the human input invested in the production process; it is the human effort exerted when a lumberjack uses a chainsaw (capital) to cut down a tree (land).
Many economists also identify a fourth factor of production: technology. Technology refers not just to robots and computers but to the entire body of knowledge or science that informs or improves a production process.
And finally, some economists also include entrepreneurship as a factor of production. Like labor, entrepreneurship is a human input factor but it refers to more than just work; it refers to the creativity and initiative needed to start a business, develop new goods and services, or improve on the development and distribution of existing products.
|Year||Total U.S. Coal Production||Total U.S. Coal Miner Employment||Annual Production Per Miner|
All societies possess a set of resources that can be placed in these categories. But since the first rule of economics tells us that all resources are limited, societies cannot produce all of the goods and services that these resources could be combined to produce. Choices must be made, trade-offs must be accepted, and opportunity costs must be paid.
Why It Matters Today
When you start working, you will become a factor of production: labor. (And hopefully later in life, once you've built up some bank, you can become capital, too.)
But in your laboring days, you'll want to make sure not to choose a job that is going to be made obsolete by technology. There's not much need anymore for telegraph operators or horse-and-buggy drivers; the telephone and automobile did those jobs in.
A few jobs that are likely to go down as the horse-and-buggy drivers of the 21st century, probably sooner than later:
- Bank teller
- Telephone operator
- Photo processor
- Video store clerk
- Newspaper classifieds salesperson
Remember, choose rationally! That's what economics is all about...
Sometimes, a Song Says it Better: Money for Nothing, by Dire Straits
Technology has fundamentally changed how we live. “I want my MTV”…and my refrigerator, color tv, and microwave oven.
Factors of Production, the Four Types, and Who Owns Them
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 property and anything that comes from the ground. 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 resources. These include 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. Global warming is beginning to change that, making Canada one of the winners of climate change.
Labor as a Factor of Production
Labor is the work done by people.
The value of the workforce 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 releases the current U.S. jobs report the first Friday of each month. The report 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. 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.
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 real 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 businesses, 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. One 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||Socialism||Capitalism||Communism|
|Are owned by||Everyone||Individuals||Everyone|
|Are valued for||Usefulness to people||Profit||Usefulness to people|
Why Some People Think There Are 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.
In Depth:Current Labor Force Participation Rate | What Is Being Done to Control Unemployment? | How to Protect Yourself From Unemployment