Factors of Production in Economics: Definition, Importance & Examples

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  • 0:00 What Are Factors of…
  • 0:23 Importance
  • 0:48 Types of Factors and Examples
  • 2:19 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
In this lesson, you'll learn about factors of production in economics, including their definition, their importance, and some examples. You'll also have a chance to take a short quiz.

What Are Factors of Production?

Factors of production are the resources used by a company to produce goods and services. The universally recognized factors of production include land, labor, and capital. Some scholars include enterprise - entrepreneurship - as a fourth factor while many argue that it should fall under labor.


As the Greek philosopher Parmenides said, 'Nothing comes from nothing.' Factors of production are the resources that allow us to create finished products and perform services. You can't create a product out of nothing. You can't even perform a service without labor, which is also a factor of production. A modern economy, along with our modern society, cannot exist without factors of production, which makes them pretty darn important.

Types of Factors and Examples

Let's take a look at each of the factors along with some examples.

Land is often an essential factor of production in many economic activities. In fact, if you really think about it, it's impossible to do anything without land - where else are you going to place your factory, grow your crops, mine your minerals, drill for oil, or even stand to provide a service to a customer? Keep in mind that land includes not just the dirt, but also the natural resources on it or in it, such as trees, water, precious metals, minerals, and fossil fuels.

Labor is also essential. Products don't create themselves, and you need people to provide services and people to manage business activities. You can basically think of labor as the exertion of any type of human effort in producing something or providing a service. Some labor is relatively unskilled, such as digging ditches, while other labor requires a high degree of education and skill, such as mapping the human genome.

Capital is anything created by humans for the purpose of producing goods or providing services. Natural resources are not capital because they are not made by humans. You can divide capital into fixed capital, such as factories, offices, furniture, computers, machinery, tools and equipment, and circulating capital, such as raw materials, inventory, and partially finished goods. Fixed capital stays with you, while circulating capital is either used up or sent out of the company as finished products, for example.

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