Definition
Factors of production are the fundamental inputs an economy uses to create everything it produces. Economists traditionally group them into four categories: land, labor, capital, and entrepreneurship.
Land covers all natural resources, from physical territory to minerals, water, and forests. Labor is human effort, both physical and mental. Capital refers to the tools, machines, buildings, and infrastructure used to produce other goods. Entrepreneurship is the ability to organize the other three and bear the risk of bringing a product to market.
Why it matters
How it works
Producers combine the four factors in whatever proportions are most efficient given their relative prices. A firm in a labor-rich, low-wage setting may use more workers and fewer machines, while a firm facing high wages substitutes capital for labor. Each factor is paid according to the income it generates: landowners receive rent, workers receive wages, capital owners receive interest, and entrepreneurs receive profit as the reward for risk and coordination. Because an economy's output is bounded by the factors it has and how well it uses them, economic growth ultimately depends on expanding these resources or raising their productivity.