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Factors of Production

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Factors of Production - Lesson Summary

Goods and services we use are made available to us through production. There are four factors of production i.e. land, labour, physical capital and human capital.

The first requirement for production is land. Land as a production factor also includes other natural resources like water, forests and minerals found in the earth’s crust.

The second requirement for production is labour or workforce. These are the people who do the different tasks involved in production.

The third requirement for production is the inputs required for the different stages of production. These inputs are called physical capital or simply capital. The most important factor here is the entrepreneur, who is willing to risk his capital to start a production activity.

Physical capital includes inputs like machinery and tools, money and raw material required for production. Some inputs like the building of a factory and the tools and machinery installed in it can be repeatedly used for production year after year. They do not get used up in production. Such inputs are called fixed capital.

Inputs like raw material and the money used for buying it, paying electricity bills and the wages of workers, etc. get used up in the production activity. These inputs are called working capital. The fourth requirement of production is human capital. Human capital is the knowledge and effort that is put in to arrange for the other factors like land, labour and physical capital to start the production of goods or services.

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