The factors of production are the building blocks of the economy; they are what people use to produce goods and services. Economists divide these factors of production into four categories. These categories are:

  1. Land: This includes any natural resource used to produce goods and services. It is not restricted to land only, but anything that comes from the land. Some common and natural resources are water, oil, copper, natural gas, coal, and forest. Land resources are the raw materials in the production process. These resources can be renewable, such as forest, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resource is called rent.
  2. Labour: This is the effort that people contribute to the production of goods and services. Labour resources include the work done by the waiter who brings you food at a local restaurant as well as that of the engineer who designed the machines used on the farm. It includes hand work of the blacksmith who designed the simple farm implements as well as that of a farmer and a farming family engaging in the day-to-day running of the farm. If you have ever been paid for a job, you have contributed labour resources to the production of such good and services. The income earned from by labour resources is called wages and is the largest source of income for most people.
  3. Capital: Think of capital as the machinery, tools and buildings man use to produce goods and services. Some common examples of capital include cutlasses, tractors, plough, computer, hoes, etc. In recent times, modern economists have considered money not to be a factor of production – say capital. This is because it is not a productive resource. While money can be used to buy capital, it is the capital good (things such as machinery and tools) that is used to produce goods and services. Capital differs based on the workers and the type of work being done. For example, a doctor may use a stethoscope and an examination room to provide medical service, while a teacher may use a textbook, desk, and a whiteboard to produce education services. The income earned by owners of capital resources is interest.
  4. Entrepreneur: An entrepreneur is a person who combines the factors of production (Land, Labour, and Capital) to earn a profit. For example, an individual who decides to set up a farm, or a retailer who decides to buy at farm-gate and sell to consumers are both considered as entrepreneurs. The most successful entrepreneurs are innovators who find new ways to produce goods and services to bring to market. Without entrepreneurs bring these factors of production together, a lot of goods and services available to us now wouldn’t have been.


Define the phrase “factors of production”.

Briefly explain any two factors of production.