What are Factors of Production?

In economics, factors of production are the set of elements indispensable to a productive process, be it a good or service. The theory of factors of production is the basis of economic studies.

Traditionally, economists have identified three key factors for the production of a good or service: land, labor and capital. New economic theories were subsequently adding elements to this division.

What are the factors of production?

Earth

The earth element includes not only the area under cultivation or construction, but all the natural resources that are above and below it. The concept therefore encompasses forests, mines, water, air and energy.

Job

The work factor includes both the hours of work used in production as well as the knowledge, technique and capabilities of those who participate in the process. This element is also often called human resources.

capital

The capital element refers to the set of material elements that support production, such as industrial machinery, computer equipment and telecommunications, transportation and facilities, among others. In short, capital equals production goods.

Other factors

Over the years, economists have added new factors to the classical division that they have come to consider essential in a productive process. Its adoption, however, is not consensual and depends on the analysis model employed.

One of the factors of production added to the classic division is the entrepreneurial capacity, sometimes called entrepreneurship. This factor refers to the organization of production, that is, the action of gathering and combining the other factors of production, assuming the risks of the process.

Another factor added to the classic division is technological capacity. It encompasses three categories: invention, innovation and operation.

The invention is the capacity for research and development. Innovation is the ability to apply technology in the production process. The operation refers to the capacity to operate the production activities.

Characteristics of production factors

The main characteristic of the factors of production is that they are scarce, that is, finite. The labor factor, for example, depends on the size of the economically active population (EAP) in a given region. The same logic applies to natural resources and production goods.

It is the scarcity of factors of production that limits the ability to fully satisfy consumer desires, which economic theory classifies as infinite.

This scarcity, identified as the main reason for the development of economics studies, increases the importance of decision-making by society on how the factors that are available should be employed. That is, about what should and should not be produced.

In addition, a factor can also be characterized taking into account the role it plays within the production process and its relationship with it. The three main characteristics of the production factors are versatility, substitutability and complementarity.

Adaptability or versatility

It refers to the ability of a production factor to adapt to new situations, such as an increase in production or a change in the goods being produced. That is, a versatile factor is one that can be applied in more than one way. An example of a production factor that has this characteristic is energy.

Substitutability

It refers to the ability to replace, at least partially, labor with capital and vice versa. It is the process that occurs, for example, with the automation of industrial plants, in which the number of workers is reduced with the adoption of new machines.

Complementarity

It is the characteristic of situations in which it is only possible to produce by combining labor with capital. In other words, in this case, these two factors are always complementary.

An example of a good that has this characteristic is a truck. In order for him to participate in the production process, he must necessarily be driven by a driver.