Inputs: Factors of production
To produce goods or services, a firm must use a range of resources. These resources are called the factors of production or factor inputs. These resources are categorised into four groups:
- Land - this is the land itself, the factory site, for example. It also covers unprocessed raw materials derived from the earth or water.
- Labour - the services given by all employees of the business. A labour-intensive business is one that has a high proportion of labour inputs, normally because labour is relatively cheap.
- Capital - money, or the assets such as buildings, plant and equipment, which it has bought and uses in the production process. Capital can be thought of as anything used to produce something else. Money is capital only when it is used to buy business assets such as machinery and raw materials. A capital-intensive business depends more heavily on capital than the other factors of production. This is often because labour is relatively expensive.
- Enterprise - that 'spark' or idea which the founder or entrepreneur provides. This will include the planning that brings together the other three factors of production.
The provider of each factor receives a reward for being involved in production:
- Land owners receive rent
- Employees receive wages and salaries
- The providers of capital receive interest
- Entrepreneurs get to keep the profit - if there is any - for their risk-taking in setting up the business process and for their additional responsibilities and decision making in the business process.