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Four Factors of Production: Land, Labor, Capital & Entrepreneurship

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  • 0:01 Factors of Production
  • 0:39 Land
  • 1:30 Labor
  • 2:03 Capital
  • 2:39 Entrepreneurship
  • 3:33 Lesson Summary
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Lesson Transcript
Instructor: Jason Nowaczyk
In this lesson, you'll learn about the four main economic inputs, known as factors of production, needed to produce all goods and services in an economy: land, labor, capital, and entrepreneurship.

Identifying Factors of Production

You may have at some point in your life been part of or seen local neighborhood children running a lemonade stand. Running a lemonade stand is probably the simplest example that showcases one of the main goals of our economic system: to make a profit. In order to make a profit, a person usually needs certain things, or certain economic inputs. The economic inputs used to make a profit are called factors of production. According to traditional economic theory, there are four main factors of production: land, labor, capital, and entrepreneurship.

Land

In its simplest form, land is the physical place where economic activity takes place. In our lemonade stand example, it could be the patch of lawn in front of your house. However, land also includes all the natural resources found on it.

Land can also include natural resources such as timber
land

Resources can include timber, water, oil, livestock, and so forth. So if you used real lemons from a tree in your yard to make that lemonade, you used part of the land. Land plays an important part in production because land itself and the resources on it are usually limited. Political regulations prevent a person from just going and claiming something for themselves, or there may not be enough for everyone to have. Also, many of the natural resources are nonrenewable, meaning that their amount is fixed, and they can't be used indefinitely. Thus, producers must carefully manage land and its resources.

Labor

It seems obvious, but things can't be produced unless someone makes them. Your lemonade won't make itself, and it won't sell itself if you aren't there to do it. Therefore, another important factor of production is labor. Labor represents all of the people that are available to transform resources into goods or services that can be purchased. This factor is somewhat flexible since different people can be allocated to produce different things. Nobody has to produce everything themselves. That would be impractical. It's also important that a labor force is well educated and well trained to ensure that they can produce goods at peak efficiency and quality.

Capital

Perhaps to get your lemonade stand up and running, you also needed money to make signs to advertise your delicious drink. You may also have used a small table to set up your pitcher and cups. Both of these things - money and equipment - are considered capital. More specifically, capital can be the money that companies use to buy resources, as well as the physical assets companies use when producing goods or services, such as factories and machinery.

Capital often refers to money to buy resources
capital

Capital is an important factor of production because it's what allows labor and land to be purchased. Steady streams of capital are often required in order to keep a business going.

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