Factors of Production: Definition & Examples

Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

There are four factors of production. The four factors are inputs needed to produce a product or provide a service. These factors include natural resources, human resources, capital, and entrepreneurship.

Factors of Production

Lenny Leibowitz was fresh out of woodworking school when he got the idea that he wanted to build accent tables for a living. The idea of working with wood, sandpaper, and varnish was so appealing to Lenny that he wrote a business plan and opened up a shop right away.

In the company plan, Lenny included all of the things he needed to open the business. Although he did not know that he was applying the Factors of Production at the time, he soon realized that he needed to have four things in place. The factors included natural resources, human resources, capital, and entrepreneurship.

Natural Resources are raw materials that come from the earth, like wood, iron, coal, and ore, that will eventually become a finished product. For Lenny, lumber like oak and pine are essential for his accent table business. He also needs nails made from iron or steel to secure the table parts. Stains and varnishes are used to finish the tables.

Lenny knows he cannot perform all of the work himself, and that's where his Human Resources comes into the picture. In Human Resources lingo, workers are called inputs. Lenny must employ two kinds of inputs. Intellectual Inputs are those people paid to think, like accountants, designers, and engineers. But he also needs Physical Inputs to perform the actual work. These are people who are paid to perform physical tasks, like woodcutters, sanders, and maintenance staff.

Lenny knows that it takes money to make money. So, he must obtain the necessary Capital to make his table production business successful. Capital has two meanings. For one, it means Lenny needs to have enough money to buy raw materials and pay employees for their work. Capital is also the assets owned by a company like land, buildings, and even information.

But most importantly, Lenny needs to have that risk-taking desire to own and operate his own business, and that is Entrepreneurship. A person who is willing to chance everything to pursue the dream of business ownership. Lenny must be prepared to gather resources, develop people and manage money to achieve his business goals.

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