Factors of Production

Definition: In economics, factors of production, as the name signifies are the inputs or say resources acquired by the firm to use them in the production of goods or services, so as to earn a profit.

The word ‘production‘ refers to a systematic process of converting the inputs, into finished products, which can be goods or services. For this purpose, the product has to pass through different processes, stages and hands, to reach the final consumers, in its consumable form. The production level is based on the quantity of inputs and production capacity of the firm.

Factors of Production

Basically, there are four factors of production, on which the entire process depends. These Factors are:factors of production


With respect to factors of production, the word ‘land’ has a different meaning in economics, as it covers all free gifts of nature such as natural resources, air, light, water, natural vegetation, fertility of soil, heat, etc. rather than just an area or earth’s surface. The economic reward for using the land is rent.

Salient features:

  • The land is a nature’s gift to us, which does not need any effort of human beings to create it or avail it for the purpose of production.
  • All the natural resources are limited in supply, and so does the land. This is what makes it different from the rest of the factors of production, i.e. it cannot be increased with an increase in demand.
  • It is ever-lasting, and it is indestructible in nature, as well as it can be put to various uses.
  • The land is immobile as it cannot be shifted from one place to another, as well as it is a passive factor of production, as it cannot produce anything on its own.
  • It is heterogeneous in that no two surfaces of land can be exactly similar as they vary in quality and condition.


Labour refers to the human resource who exerts physical or mental efforts, to produce the goods or services for specific consideration, i.e. salary, or wages.

Salient features:

  • Labour is directly associated with human efforts and due to this reason fair wages, good treatment, work environment and working conditions are necessary for labourers.
  • It is perishable, meaning that if labour has not worked on a particular day, it cannot be fully recovered by overtime working on some other day.
  • It is an active factor of production, whose participation is important for other factors such as land and capital to produce.
  • Labour is heterogeneous in nature, i.e. the efficiency of labour differs from one person to another, which depends on his skills, competency, productivity, etc.
  • It is mobile in nature, as labourers can move from one place to another or from one firm to another to find suitable work for them.
  • Labour’s bargaining ability is not very strong and convincing. Labour cannot be stored and due to this reason, they get ready to work at the wages decided by the employer.
  • Labour supply can be changed, but not instantly and so the supply is inelastic. Further, the supply is based on a number of factors like the size of the population, desire to work, attitude towards work, age and sex composition, etc.


Capital can be understood as all the human creations, such as tools, plant and machinery, equipment, money, etc. which are used for further production of wealth. In better words, capital is not an original and principal means of production, rather it is a produced one.

Salient features:

  • It is not a gift of nature, as land, instead is a man-made factor of production.
  • It is a secondary and artificial factor of production.
  • It is mobile, as it can easily be transferred from one place to another.
  • It has an opportunity cost, as it can be put to alternative uses.
  • The supply of capital can be increased or decreased according to demand. So, the supply is relatively elastic.
  • Capital is durable in nature, it is long lasting, but depreciates over time.


An entrepreneur is the most important factor of production, without which the production process cannot be initiated as the rest of the factors are disorganized or dispersed at various locations and it is the entrepreneur who takes charge of arranging and assembling them, to start the process of production.

An entrepreneur performs the role of an innovator, manager, organizer, leader, risk-taker, and coordinator. The reward of an entrepreneur is profit.

Salient features:

  • He/She is the one who plans, organizes, coordinates, controls and allocates the other means of production.
  • An entrepreneur is ready to bear the risks and uncertainties associated with the process of production.
  • He/She makes plans and strategies for the future moves and actions, as well as takes all the decisions for the firm quickly and logically.
  • He/She has the ability to embody innovation into product and services.
  • An entrepreneur is a change agent, who brings change in the firm’s process, to compete effectively in the business environment by adopting modern techniques of production.

Factors of production, plays a crucial role in our lives, as even a small pin cannot be created if any of the factors of production are missing or not actively participating.

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