What are Factors of Production?

Factors of production is a term often used by economists. It refers to categories that can be used to classify items that are needed if goods and services are to be provided. The three categories — land, labor, and capital goods — consist of a wide range of natural and man-made items.

When considering what is necessary for the process of creation, it is fairly simple to understand that making one item requires other items. Factors of production are three broad categories, which encompass everything that is put into the creation process, whether the outcome is tangible or intangible. Tangible creations are commonly referred to as goods and intangible creations are generally services.

Each of the three factors of production plays a role which cannot be fulfilled by using items in another category. This means that if all factors of production are not available, a creation cycle cannot be completed. The first category usually recognized is land, which can be considered the provider and the accommodater.

Items in this category do not refer solely to earth's solid surface. In this category lies other components of the environment, such as water, sunlight, and minerals. Without land, there would be no raw products provided from which finished products could be made. Man-made creation also could not be accommodated because there would be no place to produce anything or to render services.

One unique characteristic of land, in this sense, is that it is the only category that includes both renewable and non-renewable resources. Trees and sunlight, for example are resources that will naturally be replaced. Coal and plots of earth are examples of resources that cannot be replaced.

Labor refers to human efforts that are used to make things. If people were not involved in the creation process, raw products would not become the complex goods or services that are used every day to satisfy our needs and desires. Production requires many different types of labor, some of which is not physical. Some peoples' contributions are mostly mental. This can be seen when comparing a construction worker and an analyst.

The final factors of production is capital, which are creations that help to perpetuate growth of the creation process. The provision of many services are based on technology, for example. When analyzing the cycle, it can be seen that humans use raw material to produce technology, which is then used for other purposes that contribute to the economy. The same cycle applies to goods. People remove metal and rubber from the environment to make machines, which are in turn is used to make retail products.