ECON101: Principles of Microeconomics (2021.A.01)

There are three factors of production that are required to produce economic output: land, labor, and capital.

Learning Objectives

Discuss the role of capital and resources in production

Key Takeaways

Key Points

• Land includes the site where goods are produced as well as all the minerals below and above the site.
• Labor includes all human effort used in production as well as the necessary technical and marketing expertise.
• Capital are the human-made goods used in the production of other goods, such as machinery and buildings. It does not include cash.
  

Key Terms

• capital: Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and office buildings (structures).
  

Factors of production are the inputs to the production process. Finished goods are the output. Input determines the quantity of output; in other words, output depends upon input. Input is the starting point and output is the end point of a production process and such input-output relationship is called a production function. There are three basic, otherwise known as classical, factors of production:

• Land: which includes the site where goods are produced as well as all the minerals below and above the site;
• Labor: which includes all human effort used in production as well as the necessary technical and marketing expertise; and
• Capital: which are the human-made goods used in the production of other goods, such as machinery and buildings.
  

Land is sometime included with capital in certain situations, such as in service industries where land has little importance. 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.

Further Defining Capital

In accounting and other disciplines, the phrase "capital" can also refer to cash that have been invested in a business. 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.) is classified as profit.

It is important to note that the final output is the result of the combination of all of the inputs. Things like technological advancement and worker productivity are intricately tied to the productivity of the inputs; it is not enough to simply have the factors of production in one place without the knowledge and ability to convert them into the correct outputs.

Source: Lumen Learning, https://courses.lumenlearning.com/boundless-economics/chapter/capital-and-natural-resource-markets/
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 License.