Factors of Production

Lecture 1,2, 3 cont…

 HOW ARE GOODS PRODUCED?

Factors of production – Economic resources

The productive resources used to produce goods
and services.
Factors of production are grouped into four
categories:
• Land (Natural Resources)

• Labor (Human Resources)

• Capital
• Entrepreneurship
HOW ARE GOODS PRODUCED?

Land
oWhat Raw materials are needed to produce your product?

oThe “gifts of nature” that we use to produce goods and services. All the
things we call natural resources.
oComes from the air, water, or the earth
oLand, minerals, water
•Renewable
oWater, air growing things
•Non-Renewable
oCoal, oil
Factor 1: Natural Resources
• Nature supplies raw materials
necessary to make things
• These raw materials are called Natural
Resources
–Example: Chicken
noodle soup contains
chicken meat, spices,
water, and vegetables, all
of which came from the
nature
 HOW ARE GOODS PRODUCED?

Labor
• What will your employees have to do to create your product?
• What work will need to be done to turn your raw material into
your finished product
o Work time and work effort that people devote to producing

goods and services

• People’s efforts, labor
• Effort can be physical or mental
Factor 2: Human Labor
• Human effort used to produce goods
and services is called labor
• Labor can be physical or mental
•Example: to the soup, farmers raise the
animals and crops, a truck driver drives
them to a factory, and workers operate
machinery to mix and can it
(physical labor)

•Someone has to design the machines,

and think of a recipe for the soup
(mental labor)
 HOW ARE GOODS PRODUCED?
o Capital
o What equipment and people will you need to create
your product
o Physical capital: What tools, machines and factories will you needed
to create your product
o Financial capital: funds the firm use to buy physical capital
o Human capital: What knowledge, skills, education and experience
will your employees need to have in order to produce your product (for
example: a seamstress , a chemist, a computer technician )
• Goods made by people and used to produce other goods and services
• Tools, instruments, machines, buildings, and other constructions that have been
produced in the past and that businesses now use to produce goods and services.
Factor 3: Capital Resources
• Producing goods and services requires
tools and equipment
• The buildings, machines, supplies, etc.
used to produce are called capital
resources, or capital goods

•Examples: the truck used

to drive to the factory, the
machines used to can the
soup, and the factory
building itself
HOW ARE GOODS PRODUCED?
o Entrepreneurship
o The human resource that organized and combines labor, land,
capital.
• The quantity and quality of entrepreneurship is hard to
describe and measure.
• But we can easily recognize brilliant entrepreneurs by their
enormous financial success.
o Sam Walton (Wal-Mart), Bill Gates (Microsoft), and Michael
Dell (Dell Computers) are examples of outstanding
entrepreneur's.
Entrepreneurship:
The 4th Factor
• Making the other 3 factors of production
into something useful often takes
creativity and some risk
• Entrepreneurship is the factor of
production that ties the others together
•Examples: Someone has
to decide what to name the
soup, where to sell it, and
how much to charge
In Economics production…..
Production function