What goes into making a product or providing a service? Sometimes, it’s simple—as any kid who has set up a lemonade stand can tell you. More often, many different elements (especially in the cases of tech, electronics, and pharmaceuticals) must come together to make a product that can succeed in the marketplace.
Typically, this production process is broken down into four components, known as factors of production: land, labor, capital, and entrepreneurship. Learn what these are and what role they play in starting a business.
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What are factors of production?
Factors of production are the resources businesses use to make a product or service. The four main factors of production—land, labor, capital, and entrepreneurship—make up the necessary inputs in the production process.
Land includes natural resources and also the space for a business to operate. Labor is the human effort that turns those natural resources into something valuable, using the equipment, factories, and other structures made possible by capital. Entrepreneurship is what brings together the other three factors.
Depending on your specific business and industry, different factors will play more or less significant roles. For example, land is an indispensable factor in farming, and capital in the form of machinery is critical for an assembly line. Meanwhile, entrepreneurship has more relative importance when someone launches a new ecommerce business.
The 4 factors of production necessary for business
Explore in depth the core factors of production that propel every business forward:
Land
This factor includes the land itself as well as the natural resources that come from the land. For example, the wood that furniture company Fyrn uses to create its distinctive chairs and tables is considered a land factor of production. Whether it’s a natural resource like cotton for clothing or silver for jewelry, land is an essential component of the production process for ecommerce merchants selling physical products online.
Beyond providing the raw materials for production, land can also provide the physical space necessary to produce goods. For example, if you own a warehouse, the land it sits on is considered in this factor of production, as well as any resources like natural gas used to power it.
Labor
Labor is a factor of production encompassing the human effort required to produce goods or services. With an estimated 3.5 billion people employed worldwide, labor is an enormous factor of production in today’s global economic system. Labor is a critical factor for ecommerce merchants and small businesses. It takes a lot of work to bring an idea for a product to market, from product ideation and prototyping to sourcing materials and maintaining quality control during the production process.
As an ecommerce merchant, you can hire employees, such as a designer or product manager, to help bring your products to the market. For some small businesses, the labor might involve only one person.
For example, on an episode of the Shopify Masters podcast, Michael Pan discusses how he started his mushroom jerky company using his own labor to bring his product ideas to life. He worked on his business as a side hustle for more than a decade before going full-time.
Capital
Although the term “capital” is often interpreted as financial capital, here, capital is the physical assets used to create a product or service. This can include capital goods like machinery, buildings, equipment, and vehicles. Capital can also include non-physical assets like software.
For example, an entrepreneur producing and selling online courses would need capital in the form of a computer, video camera, and editing software.
Capital provides the tools necessary to facilitate the production process. For example, a print-on-demand company making custom t-shirts would consider its printing machines capital. This concept can apply to services as well. A small business selling and delivering flowers would consider its delivery car a capital good.
Entrepreneurship
Entrepreneurship is the fourth factor of production and the one that brings the other three production factors together to produce a product or service. Entrepreneurship is a powerful factor of production in today’s world of ecommerce, with the Shopify Entrepreneurship Index reporting that the global business activity generated by entrepreneurs amounted to about $490 billion as of 2022.
Entrepreneurship requires creativity and resourcefulness to turn factors like capital, labor, and land into a product or service. For example, entrepreneurs Clare and David Hieatt founded Hiut Denim Co. in 2012 in their hometown of Cardigan, Wales. The couple used their entrepreneurial skills to create a company that brings together land in the form of cotton, capital in the form of sewing machines and other equipment necessary to make jeans, as well as their own labor and that of a skilled workforce with a history of producing denim.
Factors of production FAQ
What are the four factors of production?
The four factors of production are land, labor, capital, and entrepreneurship.
Is money a factor of production?
Money, per se, is not considered a factor of production. However, money can purchase land, pay for labor, and buy capital goods such as the buildings, machinery, or computers needed to make a product or deliver a service.
How are the factors of production connected?
Land provides the natural resources and space necessary to produce something; labor is the human effort that turns those raw materials into products. Meanwhile, capital provides the necessary tools and assets used in the production process, and entrepreneurship is the ingenuity bringing the other factors together to create a product or service.
