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Production Factors and Importance


Production is defined as the creation of goods and services to satisfy human wants. Successful production can only take place when there are adequate factors of production. These factors include land, labor, capital and entrepreneurship. These factors must be rewarded accordingly if a meaningful business is to be achieved. The reward for labor is wages, interest for capital, rent for land and profit for entrepreneurship. A decrease or increase in any of the factors of production is directly and proportionally related to the production level attained within a specified period of time.

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Adequate supply of factors of production would translate to better production and consequent provision of goods and services. Countries whose economic resources are abundantly available coupled with robust existence of human resources would always achieve economic growth thorough its financial years. This is seen especially in developed countries like Japan, China, India, United States, Britain, Ghana, Egypt, Qatar and etc.

Production is an important activity in the business environment for it ensures continuity by creating place and form utility for goods and services. However effective production must be supported by constant availability of factors of production. The purpose of this paper is to expand the reader’s knowledge in understanding how factors of production contribute to affect production. Where there is abundant presence of all the required factors of production in the right proportion, production is likely to increase. However, a decrease in the factors will likely lead to a fall in the production level. This is the basis on which this paper is built.


Land refers to all the natural resources that are found on the earth surface but are used in the creation of goods and services to satisfy human wants. The reward of land is rent. While capital, labor and entrepreneurship remain flexible, land exhibits a unique characteristic of being fixed in supply. Land can never be moved and at the same time may be difficult to increase. Land is therefore referred to as a passive factor of production and may include water, air, minerals, plants and animals. The main characteristic of land that is relevant to economists is that its supply is limited. Under the principal of scarcity of natural and economic resources, entrepreneurs are expected to make rational decisions before any investment is undertaken. This is so because the question is about achieving maximum returns using the limited resources.


Labor refers to any mental or physical efforts of man used in the production of goods and services to satisfy human wants. Labor uses capital to produce goods and is subject to the availability of natural resources and raw materials. Labor also relies on factory buildings and infrastructure. Its reward includes wages and salaries. There are two main categories of labor; skilled and unskilled. Skilled labor refers to human personalities with technical and professional training backgrounds while unskilled labor constitutes a workforce with a relatively lower training skills and competency. The type of labor used at any given point is likely to influence production level; skilled labor is perceived to be efficient and therefore may affect production positively though it is expensive. On the other hand unskilled labor is cheap but may not be efficient in the long run. The type of labor required may be determined by the nature of the activities of the organization. However, given the volatile and dynamic nature of the current global economy, there is a shift from industrial economy to knowledge based economy therefore the use of unskilled labor may awkwardly disadvantage an organization.


Capital is defined as man made resources that are used to create other goods and services for consumption. Capital may include roads, buildings and factories, machineries, and money. The reward for capital is interest. Capital depends on labor to produce and remains the most susceptible to risks. An increase in capital especially financial capital is likely to influence production activities. More money for instance would lead to increased volumes of business activities. A solid infrastructure is likely to support organizational processes such as communication, transport and logistics, warehousing, and manufacturing.


It refers to the process of organizing land, labor, and capital in the right proportion to achieve an effective production process. Classical theorists never paid much attention to entrepreneurship. Today the latter has become synonymous with business. In order to realize an effective production, there must be coordination of critical activities, for instance labor needs to be controlled, and capital on the other hand needs wise investment and management decisions. These concrete decisions can only be made by the entrepreneur. The reward for entrepreneurship is increased profit. (Factors of production, 2009)

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Effective production can only take place when there are effective factors of production. These factors need to be put in the right proportion so that a meaningful process is achieved. While land remains fixed in supply, careful consideration should be taken so that reasonable returns are obtained to compensate the entrepreneur for his effort.

Work cited

Factors of production. 2009. Web.

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