5 Factors of Production
Economic systems rely on certain inputs to operate effectively. Collectively, these inputs are called the factors of production. They are the resources businesses use to create wealth. There are five factors of production: land, labour, capital, entrepreneurship, and knowledge. While knowledge is as old as humankind, it is only recently that it has been recognized as a factor of production. Here are some tips to help you understand the five factors of production:
Labour refers to all natural resources. It comprises things found in man’s natural environment which can be used in producing goods and services. Examples include the earth itself (which forms the site where the enterprise is situated), climate, vegetation, water, and mineral deposits. The reward for land is rent.
Labour is another input of production. It refers to human efforts both mental and physical directed towards the production of goods and service. Among contemporary writers and scholars, labour is distinguished from entrepreneurship and knowledge. The reward for labour is wages or salaries.
Capital refers to all man-made productive assets used to further production. These productive assets are not wanted for their own sake (the satisfaction they yield), but because they help to produce other commodities. To better appreciate this input of production, we classify it into two forms: capital good and capital fund. The former consists of such things as tools, equipment, buildings, fixtures, means of transport, as well as raw materials in the process of manufacture, and inventory for sale. Capital fund, on the other hand, refers to money or cash that is available for investment in business enterprises. It could be in the forms of stocks, shares, loans and debentures. The reward for capital is interest.
Entrepreneurship has been distinguished from labour, because, labourers cannot make a contribution without the entrepreneur. The labourers need to find work in order to make a contribution, and the entrepreneur makes this job available. Without the entrepreneur, all other factors of production are of little economic value. The entrepreneur identifies a business opportunity, organizes the other factors, and assumes the risks of success or failure of the business venture.
Entrepreneurship, simply put, is the exploitation of opportunities that exist within a market through the combination of other factors of production. The reward for entrepreneurship is profit.
We have distinguished this factor, knowledge, because it is increasingly being recognized as a vital factor of contemporary business. It is distinct from labour. It is a critical and meaningful resource in any economy. Knowledge is fluid. It can be captured, codified and transmitted. While others, cannot be completely articulated, for example, skills and competencies (tacit knowledge) can only be shard through interaction with people and the environment. Knowledge resides in the mind of the holder or knower, and when it is transmitted it becomes information.
Knowledge is a fluid mix of framed experience, values, contextual information, and expert insight that provides a framework for evaluating and incorporating new experiences and information. It originates and is applied in the minds of knower. In organizations, it often becomes embedded not only in documents or repositories but also in organizational routines, processes, practices, and norms. (Davenport & Prusak, 1998: 5)
Knowledge as the fifth factor of production is increasingly being recognized as the driver of productivity and economic growth. And it has certain unique characteristics that distinguish it from physical labour. These are:
- Knowledge is expandable and self-generating: As an engineer or doctor gets more experience, his knowledge base will increase, and
- Knowledge is transportable and shareable: This means that it is easily moved and shared. This transfer, however, does not prevent its use by the original holder.
It has been emphasized that knowledge resides in people’s minds, expectedly, the reward for knowledge is wages or salaries.
Knowledge, entrepreneurship, labour, capital and land has described as factors of production needed in any economic system, so as to operate effectively. The rewards for these factors were highlighted.