In Economics, factors of production or resources are the inputs to the production process.

Finished goods are the output. Input determines the quantity of output i.e. output depends upon
input. Input is the starting point and output is the end point of production process and such inputoutput relationship is called a production function. There are threebasic resources or factors of
production: land, labour, capital .Some modern economists also consider entrepreneurship or
time a factor of production. These factors are also frequently labeled "producer goods" in order to
distinguish them from the goods or

services
purchased by consumers, which are frequently labeled "consumer goods." All three of these
are required in combination at a time to produce a commodity. In economics, production
means creation or an addition of utility. Factors of production (or productive 'inputs' or
'resources') are any commodities or
services
used to produce goods or services.
Factors of production may also refer specifically to the primary factors, which
are stocks including land, labor (the ability to work), and capital goods applied to production.
Materials and energy are considered as secondary factors in classical economics because they
are obtained from land, labour and capital. The primary factors facilitate production but neither
become part of the product (as with raw materials) nor become significantly transformed by the
production process (as with fuel used to power machinery). Land includes not only the site of
production but natural resources above or below the soil. The factor land may, however, for
simplification purposes be merged with capital in some cases (due to land being of little
importance in the service sector and manufacturing). Recent usage has distinguished human
capital (the stock of knowledge in the labor force) from labor.[1] Entrepreneurship is also
sometimes considered a factor of production.[2] Sometimes the overall state of technology is
described as a factor of production.[3] The number and definition of factors varies, depending on
theoretical purpose, empirical emphasis, or school of economics.[4]
Contents
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1 Historical schools and factors

o 1.1 Physiocracy
o 1.2 Classical
o 1.3 Marxism
o 1.4 Neoclassical economics
o 1.5 Further distinctions
2 A fourth factor?
o 2.1 Entrepreneurship
o 2.2 Non tangible forms of capital
2.2.1 Human capital
2.2.2 Intellectual capital
2.2.3 Social capital
o 2.3 Natural resources
o 2.4 Energy
3 See also

4 Notes
5 References

Historical schools and factors[edit]

In the interpretation of the currently dominant view of classical economic theory developed by
neoclassical economists, the term "factors" did not exist until after the classical period and is not
to be found in any of the literature of that time.[5]
Differences are most stark when it comes to deciding which factor is the most important. For
example, in the Austrian viewoften shared by neoclassical and other "free market"
economiststhe primary factor of production is the time of the entrepreneur, which, when
combined with other factors, determines the amount of output of a particular good or service.
However, other authors argue that "entrepreneurship" is nothing but a specific kind of labor or
human capital and should not be treated separately. The Marxian school goes further, seeing
labor (in general, including entrepreneurship) as the primary factor of production, since it is
required to produce capital goods and to utilize the gifts of nature. But this debate is more about
basic economic theory (the role of the factors in the economy) than it is about the definition of the
factors of production.

Physiocracy[edit]
In French Physiocracy, the main European school of economics before Adam Smith, the
productive process is explained as the interaction between participating classes of the population.
These classes are therefore the factors of production within physiocracy: capital,
entrepreneurship, land, and labor.

The farmer labors on land (sometimes using "crafts") to produce goods.

The landlord is only a consumer of food and crafts and produces nothing at all.

The merchant labors to export food in exchange for foreign imports.

Classical[edit]

An advertisement for labour from Sabah and Sarawak, seen in Jalan Petaling, Kuala Lumpur.

The classical economics of Adam Smith, David Ricardo, and their followers focuses on
physical resources in defining its factors of production, and discusses the distribution of cost and
value among these factors. Adam Smith and David Ricardo referred to the "component parts of
price"[6] as the costs of using:

Land or natural resource naturally-occurring goods like water, air, soil, minerals, flora and
fauna that are used in the creation of products. The payment for use and the received income
of a land owner is rent.

Labor human effort used in production which also includes technical and marketing
expertise. The payment for someone else's labor and all income received from ones own
labor is wages. Labor can also be classified as the physical and mental contribution of an
employee to the production of the good(s).

The capital stock human-made goods which are used in the production of other goods.
These include machinery, tools, and buildings.

The classical economists also employed the word "capital" in reference to money. Money,
however, was not considered to be a factor of production in the sense of capital stock since it is
not used to directly produce any good. The return to loaned money or to loaned stock was styled
as interest while the return to the actual proprietor of capital stock (tools, etc.) was styled as profit.
See also returns.

Marxism[edit]
Marx considered the "elementary factors of the labor-process" or "productive forces" to be:

Labor

The subject of labor (objects transformed by labor)

The instruments of labor (or means of labor).[7]

The "subject of labor" refers to natural resources and raw materials, including land. The
"instruments of labor" are tools, in the broadest sense. They include factory buildings,
infrastructure, and other human-made objects that facilitate labor's production of goods and
services.
This view seems similar to the classical perspective described above. But unlike the classical
school and many economists today, Marx made a clear distinction between labor actually done
and an individual's "labor power" or ability to work. Labor done is often referred to nowadays as
"effort" or "labor services." Labor-power might be seen as a stock which can produce a flow of
labor.
Labor, not labor power, is the key factor of production for Marx and the basis for Marx's labor
theory of value. The hiring of labor power only results in the production of goods or services
("use-values") when organized and regulated (often by the "management"). How much labor is
actually done depends on the importance of conflict or tensions within the labor process.

Neoclassical economics[edit]
Neoclassical economics, one of the branches of mainstream economics, started with the classical
factors of production of land, labor, and capital. However, it developed an alternative theory of
value and distribution. Many of its practitioners have added various further factors of production
(see below).

Further distinctions[edit]
Further distinctions from classical and neoclassical microeconomics include the following:

Capital This has many meanings, including the financial capital raised to operate and
expand a business. In much of economics, however, "capital" (without any qualification)
means goods that can help produce other goods in the future, the result of investment. It
refers to machines, roads, factories, schools, infrastructure, and office buildings which
humans have produced in order to produce goods and services.

Fixed capital This includes machinery, factories, equipment, new technology, factories,
buildings, computers, and other goods that are designed to increase the productive potential
of the economy for future years. Nowadays, many consider computer software to be a form of
fixed capital and it is counted as such in the National Income and Product Accounts of the
United States and other countries. This type of capital does not change due to the production
of the good.

Working capital This includes the stocks of finished and semi-finished goods that will be
economically consumed in the near future or will be made into a finished consumer good in
the near future. These are often called inventory. The phrase "working capital" has also been
used to refer to liquid assets (money) needed for immediate expenses linked to the
production process (to pay salaries, invoices, taxes, interests...) Either way, the amount or
nature of this type of capital usually changed during the production process.

Financial capital This is simply the amount of money the initiator of the business has
invested in it. "Financial capital" often refers to his or her net worth tied up in the business
(assets minus liabilities) but the phrase often includes money borrowed from others.

Technological progress For over a century, economists have known that capital and
labor do not account for all of economic growth. This is reflected in total factor
productivity and the Solow residual used in economic models called production functions that
account for the contributions of capital and labor, yet have some unexplained contributor
which is commonly called technological progress. Ayres and Warr (2009) present time series
of the efficiency of primary energy (exergy) conversion into useful work for the US, UK,
Austria and Japan revealing dramatic improvements in model accuracy. With useful work as
a factor of production they are able to reproduce historical rates of economic growth with
considerable precision and without recourse to exogenous and unexplained technological
progress, thereby overcoming the major flaw of the Solow Theory of economic growth.[8]

A fourth factor?[edit]

As mentioned, recent authors have added to the classical list. For example, J.B. Clark saw the
co-ordinating function in production and distribution as being served by entrepreneurs;Frank
Knight introduced managers who co-ordinate using their own money (financial capital) and the
financial capital of others. In contrast, many economists today consider "human capital" (skills
and education) as the fourth factor of production, with entrepreneurship as a form of human
capital. Yet others refer to intellectual capital. More recently, many have begun to see "social
capital" as a factor, as contributing to production of goods and services.

Entrepreneurship[edit]
Consider entrepreneurship is a factor of production, leaving debate aside. In markets,
entrepreneurs combine the other factors of production, land, labor, and capital, in order to make a
profit. Often these entrepreneurs are seen as innovators, developing new ways to produce and
new products. In a planned economy, central planners decide how land, labor, and capital should
be used to provide for maximum benefit for all citizens. Of course, just as with market
entrepreneurs, the benefits may mostly accrue to the entrepreneurs themselves.
The word has been blown apart by the government. The sociologist C. Wright Mills refers to "new
entrepreneurs" who work within and between corporate and government bureaucracies in new
and different ways.[9] Others (such as those practicing public choice theory) refer to "political
entrepreneurs," i.e., politicians and other actors.
Much controversy rages about the benefits produced by entrepreneurship. But the real issue is
about how well institutions they operate in (markets, planning, bureaucracies, government) serve
the public. This concerns such issues as the relative importance of market
failure and government failure.
In the book Accounting of ideas, "intequity", a neologism, is abstracted from equity in order to add
a newly researched production factor of the capitalist system. Equity, which is regarded part of
capital was divided into equity and intequity. Entrepreneurship was divided into network related
matters and creating related matters. Network related matters function in the sphere of equity and
creating related matters in spheres of intequities.[10]

Non tangible forms of capital[edit]

Human capital[edit]
Contemporary analysis distinguishes tangible, physical, or nonhuman capital goods from other
forms of capital such as human capital. Human capital is embodied in a human being and is
acquired through education and training, whether formal or on the job.
Human capital is important in modern economic theory. Education is a key element in
explaining economic growth over time (see growth accounting). It is also often seen as the
solution to the "Leontief paradox" in international trade.
Intellectual capital[edit]

A more recent coinage is intellectual capital, used especially as to information technology,

recorded music, written material. This intellectual property is protected by copyrights,patents,
and trademarks.
This view posits a new Information Age, which changes the roles and nature of land, labour, and
capital. During the Information Age (circa 1971present), the Knowledge Age (circa 1991 to
2002), and the Intangible Economy (2002present) many see the primary factors of production as
having become less concrete. These factors of production are now seen as knowledge,
collaboration, process-engagement, and time quality.
According to economic theory, a "factor of production" is used to create value and allow economic
performance. As the four "modern-day" factors are all essentially abstract, the current economic
age has been called the Intangible Economy. Intangible factors of production are subject
to network effects and the contrary economic laws such as the law of increasing returns.[11]
Social capital[edit]
Social capital is often hard to define, but to one textbook it is the stock of trust, mutual
understanding, shared values, and socially held knowledge that facilitates the social coordination
of economic activity.[12] Knowledge, ideas, and values, and human relationships are transmitted
as part of the culture. This type of capital cannot be owned by individuals and is instead part of
the common stock owned by humanity. But they are often crucial to maintaining a peaceful
society in which normal economic transactions and production can occur.
Another kind of social capital can be owned individually.[13] This kind of individual asset involves
reputation, what accountants call "goodwill", and/or what others call "street cred," along with
fame, honor, and prestige. It fits with Pierre Bourdieus definition of social capital as an attribute
of an individual in a social context. One can acquire social capital through purposeful actions and
can transform social capital into conventional economic gains. The ability to do so, however,
depends on the nature of the social obligations, connections, and networks, available to you.[14]
This means that the value of individual social assets that Bourdieu points to depend on the
current "social capital" as defined above.

Natural resources[edit]
Ayres and Warr (2009) are among the economists who criticize orthodox economics for
overlooking the role of natural resources and the effects of declining resource capital.[8] See
also: Natural resource economics

Energy[edit]
Energy can be seen as individual factor of production, with an elasticity larger than
labor.[15] A cointegration analysis support results derived from linear exponentional (LINEX)
production functions