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The Factors of Production

The Four Factors

The factors of production are the scarce resources an economy has available to produce goods and services. Economists group the factors of production into four primary categories: land, capital, labor, and entrepreneurs.

Land: Normally, land means the surface of earth. But in economics, land represents all natural resources found both above and below the surface of the earth that are used to produce goods and services. These resources include mineral resources, rocks, ground water, rain, air, and even space!

Capital: Capital includes the equipment, tools, and technology used to convert natural resources to finished goods, or to provide services. Examples of capital are factories, tractors, and hammers.

Labor: In economics, labor is any physical or mental work performed by humans to produce goods and services. Factory workers, mechanics, farmers, airline pilots, accountants, and school teachers are all part of the economy's labor.

Entrepreneur: Land, labor, and capital are scattered at different places and must be organized together in order to produce goods and services. This work is done by an entrepreneur. Entrepreneurs are individuals who start new businesses and introduce new products.

Videos

Watch the following two videos to see if cows can teach us about how economics and agriculture policy are connected. Think about how the four factors of production (land, labor, capital, and entrepreneurship) create economic opportunities.

Open The Changing Face of Agriculture (4:05) in a new window

Note: The presentation may take a moment to load. Attribution: The Changing Face of Agriculture | Economics downloaded from PBS LearningMedia, https://www.pbslearningmedia.org/resource/d7680b51-6286-4ad2-9e32-29c3f03669f7/the-changing-face-of-agriculture-economics/. Rights to use this asset do not expire. Asset Copyright: 2000. Media Credits: Funded by: USDA Rural Development and Members of Prairie Public; Source: Prairie Public. See full license here.

Open Cow Power (4:03) in a new window

Note: The presentation may take a moment to load. Attribution: Cow Power Video downloaded from PBS LearningMedia, http://www.pbslearningmedia.org. Rights to use this asset expire on 12/30/2099. Asset Copyright © 2009. Source: the.News. See full license here.

Check Your Understanding

Let's check your understanding:

Environment: A Cost or a Benefit?

  1. Read each item below and determine if it's an environmental cost or a benefit. Choose one.
    1. New regulations placed on businesses to buy new pollution-control equipment.
    2. Diminished health risks
    3. Improved visibility
  2. True or False: The costs of controlling pollution are easier to calculate than the benefits of clean air.

Agriculture (video 1, "The Changing Face of Agriculture"): Check Your Understanding

  1. What economic concept do farmers strive to accomplish daily?
  2. Can the costs of feeding cows be less if different grains are used?

Agriculture (video 2, "Cow Power"): A Cost or a Benefit?

  1. Read each item below and determine if it's a cost or a benefit in regards to agriculture (as covered in the second video, "Cow Power"). Choose one.
    1. Cows produce 30 gallons of manure each day.
    2. Cow manure and the effect on the environment.
    3. Cow Digester Equipment.
  2. Can a farmer make money selling electricity produced by the cows?

Marginal Analysis

Remember that since resources are limited, people, businesses, and governments must now decide how to use their resources wisely. When everyone understands the economic problem of scarcity they usually make wiser choices.

For instance, a student only has so many hours in a day. It is extremely hard to work a lot of hours to make money, and at the same time study enough to get the best grades.

A business that understands the problem realizes they only have so many labor, land and capital resources. The decisions that businesses make on how best to use those resources to provide the goods and services people want help determine whether a business is successful or not.

A country, knowing that its resources are limited, but having many things they want to do for their people, realize that tough decisions must be made on what the government can and cannot do.

By using marginal analysis An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. , people will try to get the most for their money, businesses will try to make the most profit, and elected officials will make the decisions that will provide the most benefit to the nation. In this unit, we will see how limited our resources are, and the costs associated with decisions. Everyone will become a better decision maker when they truly understand the problem of scarcity.

Read Introduction to the Use of Marginal Analysis from ThoughtCo to learn more.

What About Money?

Any discussion about resources must include a discussion about money Anything that is generally accepted as final payment for goods and services; serves as a medium of exchange, a store of value and a standard of value. . Money is not a resource. Money simply takes the place of the barter system.

  • You can trade your labor for cash instead of the product the company makes.
  • In this way you can take your money and purchase the goods and services you desire.

You'll learn more about money later in this course. For now it is important to realize that money is not a resource or factor of production.