Four factors of production
This transcript discusses the four factors of production: land, labor, capital, and entrepreneurship. Land refers to natural resources, while labor is the work that goes into production. Capital is the tools and buildings used to produce things, and entrepreneurship is the know-how of putting it all together. The transcript also discusses the distinction between capital goods and consumption goods.
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- What is the difference between labor and entrepreneurship?
Where would an engineer designing a chemical plant fit in?(11 votes)
- Entrepeneurship is knowledge. Labor is work effort. If I tell someone working in my bakery to add flour to a bowl, that is labor. But me knowing how much flour to add, and what else, and when, that is entrepreneurship. There might be some overlap in the same person (i.e., maybe I add the flour).(41 votes)
- What's the main idea of this video?(5 votes)
- The main idea of this video is that in order to have outputs, you need to have inputs. In other words, in order to make something there are several other things you need to make it. This video breaks those inputs that you need into four categories:
Land - a place to build and work
Labor - people that create the product
Capital - tools the people use
and Entrepreneurship - people to buy the land and organize the business(30 votes)
- could you say that land is a form of capital because it produces labor
Also why is time not a factor of production?(6 votes)
- I would add to Lauren's excellent answer that neither land nor capital produce labor.
Also, when you get to more advanced economic courses, you introduce time as well, but not as a factor of production, but rather the representation of how much of a factor you have at a particular time. For example, I have K units of capital. In the future, that becomes Kt where I have K units of capital at time t, Kt+1 units of capital one period from now, etc.(7 votes)
- How does financing relate to the four factors of production, how is it part of this economic concept? Is it just considered as part of one of the four factors and not as something separate on its own? For example, if a company needs $1 million to build a factory, is that $1 million just considered as part of the "capital" category because it is used to build the factory which is part of "capital"? And would the same concept apply if the company needed $1 million to purchase the land that the factory will be built on?(5 votes)
- Capital referred is something that produces other services or goods. That $1 million is used to build the assets which would reflect the value of the factory. Also, Land in your regard isn’t man made, meaning it has a forever life.(1 vote)
- Why isn't money a factor of production?(3 votes)
- Money refers to coins, notes and checks etc.
Factors of production are the inputs used to produce a good or service.
If you are a baker, to bake a loaf of bread you will need flour, yeast, water, salt, an oven and so on.
You won't need money, after all coins are not used as an ingredient in bread-making!
However, money can be used to purchase factors of production.
Note the difference between capital and money. Capital refers to man-made aids to production, e.g. a spade or even a whole factory.
Money is anything that is generally accepted as a medium of exchange in transactions, e.g. cash.(5 votes)
- Please explain. What would a personal car be: land, labor, capital or entrepreneurship?(3 votes)
- if the car is indeed personal, as in not involved in the company it's none of the 4 categories. On the other hand if the car is used by the company to do something, like delivering product or moving personnel to/from the factory then it's capital.(3 votes)
- can capital be also money(2 votes)
- yes, if for example you want to start a bank(6 votes)
- is there free resource, if so what is it?(2 votes)
- A free resource is a resource that is easy to obtain, like air, by anyone. It is a natural resource that is in large supply. Also, it does not cost anything to produce or consume.(2 votes)
- Would something like batteries be an example of a consumption good or capital good? Maybe both?
I am asking this because batteries can be used to power a tv or gaming controller for entertainment, but it can also be used to power a drill or the automated assembly lines in a factory.(2 votes)
- Yes, exactly, it depends on the context in which it is used.(2 votes)
- So if someone is selling a digital product, for example, a recipe, where is the 'land' input? Or do these 4 factors of production only apply to most cases?(1 vote)
- Not every good and service needs all of these factors.
In the case of a digital product, labour time went into creating it, capital was used (eg. software to make it), and someone had the idea to put these together, but it didn't need land.(2 votes)
- [Instructor] An idea that will keep coming up as you study economics is the idea of the four factors of production, which are usually listed as land, labor, capital, and entrepreneurship. And the idea here is if you want to produce anything, so let's just say this circle is the production process, and this arrow is the output, you need inputs. Now, you might have many, many, many inputs. You might need supplies, you might need a factory, you might need people to work in the factory, you need all of these different things. But the idea of the four factors of production is that these things can all be classified in one of these four groups, as either land, labor, capital, or entrepreneurship. Now, these words have meaning in everyday language. And so, some of it might jump out at you. Of course, if you need to build factory or if you need to farm, you need land to do so. And you can see that in this example here, where we see a farm. Clearly, the need a lotta land in order to have the farm. Even in a garment factory, this is a picture of a garment factory from maybe a hundred years ago, even there, they needed land on which to build the factory. So, this floor is sitting on land. And land doesn't just have to strictly mean land in an economics context. It can mean natural resources in general. This could be things like water or air or energy. So, in some contexts, instead of land, some people might say natural resources for this first factor of production. Now, another important factor of production, and arguably they're all important, is the idea of labor. To produce many or most things, someone has to work on it. So, someone had to plant these seeds, and they will have to harvest these crops. The labor is very clear here. You see people putting in work in order to produce the product right over there. Now, capital is an interesting one. It means one thing in everyday language, and it means something slightly more specific when we talk about it in an economics context. In an economic context, capital is something produced to produce other things. So, examples of capital would be tools that you use to produce other things. It could be a building that you need in order to produce other things. It could be the machinery in a factory. So, in these two pictures, there's many examples of capital. You could view this table and the tools that these folks are using, that is capital. You could use, you could view the whole building itself and all of the light fixtures and all of that as capital. So, all of this stuff is capital. The hangers that they're putting the coats on after they produce it, that is capital. In this farm example, the capital would be the buildings. These were constructed so that they could produce the food from the farm. This little, it looks like some type of machinery there, that is capital for the farm. It's being used to produce the output of the farm. Now, the place that that's different than everyday language, in everyday language, when people talk about capital, they'll often include financial capital, financial assets that could be used to get benefit in the future, things like money. But in an economic context, we are not considering financial assets, we're only thinking about things that were produced in order to produce other things. The fourth factor of production is entrepreneurship. Entrepreneurship, in our everyday language means putting things together so you're trying to create other things. When someone's an entrepreneur, you might imagine someone who's trying to start a business. In an economic context, it has a related idea. Entrepreneurship is putting together all of the other factors of production so that you can actually produce things. You can't just randomly build buildings and randomly plant seeds. Someone has to think about how do you put these things together so that you can produce things in a reasonable way? And obviously, you wanna produce as much as possible given the other factors that you are putting into the production. A related idea, and it sometimes is used interchangeably in an economics course, is technology. So, sometimes, you'll see the four factors of production as land, labor, capital, and entrepreneurship; and sometimes, you'll see it listed as land, labor, capital, and technology. But when you see this, when you see technology as a factor of production, don't think about it as technology in everyday language, where you think of computer chips or software. When people are talking about technology as a factor of production, they are really talking about entrepreneurship. They're talking about the know-how of putting together the other factors of production in order to produce that output. Finally, I wanna leave on one idea, the idea of the two types of things that could be produced from all of these factors of production. Broadly speaking, we could produce something that could be used to produce more things, and we already talk about it. We could be, in that situation, be producing capital goods. So, that could be that we are constructing a factory that itself maybe produces tools for other people to use in some other production process. The other option we have is to produce what are known as consumption goods. Consumption goods. Consumption goods are goods that are just used. It might make people happy, they might find pleasure in it, but it's not being used to produce other things. And because our production resources are scarce, there's a trade-off when a society or a factory or whoever decides how much capital to produce versus how much consumption goods. You need some consumption goods; otherwise, frankly, we wouldn't have clothing on. We wouldn't be eating nice meals. We wouldn't be able to enjoy our lives. But at the same time, you also need capital. If we did only consumption goods, at some point, we wouldn't have all the things we need to produce the consumption goods. So, it's a very interesting trade-off that we'll explore more in future videos.