Economic systems depend on certain inputs to operate effectively. Collectively, these inputs are called factors of production. They are the resources that companies use to create wealth. There are five factors of production: land, labor, capital, entrepreneurship, and knowledge. Although knowledge is as old as humanity, it has only recently been recognized as a factor of production. Here are some tips to help you understand the five factors of production:
Land
The work refers to all natural resources. It includes things found in man’s natural environment that can be used to produce goods and services. Examples include the land itself (which forms the site where the business is located), climate, vegetation, water, and mineral deposits. The reward for land is rent.
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Labor is another input of production. It refers to both mental and physical human efforts directed toward the production of goods and services. Among contemporary writers and scholars, work is distinguished from entrepreneurship and knowledge. The reward for work is wages or salaries.
Capital
Capital refers to all productive man-made assets that are used for further production. These productive assets are not sought for themselves (the satisfaction they produce), but because they help to produce other commodities. To better appreciate this production input, we classify it into two forms: capital good and capital fund. The former consists of things such as tools, equipment, buildings, fixtures, means of transportation, as well as raw materials in the process of being manufactured and inventory for sale. Equity fund, on the other hand, refers to the money or cash that is available to invest in business ventures. It could be in the form of stocks, shares, loans and bonds. The reward for principal is interest.
Entrepreneurship
Entrepreneurship has been distinguished from work because the workers cannot make a contribution without the employer. Workers need to find work to make a contribution, and the employer makes this work available to him. Without the entrepreneur, all other factors of production have little economic value. The entrepreneur identifies a business opportunity, organizes the other factors and assumes the risks of success or failure of the venture.
Entrepreneurship, simply put, is the exploitation of opportunities that exist within a market through the combination of other factors of production. The reward for entrepreneurship is profit.
Knowledge
We have distinguished this factor, knowledge, because it is increasingly recognized as a vital factor in contemporary business. It’s different from work. It is a critical and significant resource in any economy. Knowledge is fluid. It can be captured, encoded and transmitted. While others cannot be fully articulated, for example skills and competencies (tacit knowledge) can only be fragmented through interaction with people and the environment. Knowledge resides in the mind of the possessor or knower, and when it is transmitted it becomes information.
Knowledge is a fluid mix of framed experience, values, contextual information, and expert insight that provides a framework for evaluating and incorporating new experiences and information. It originates and is applied in the mind of the knower. In organizations, it is often embedded not only in documents or repositories, but also in routines, processes, practices, and organizational norms. (Davenport and Prusak, 1998: 5)
Knowledge as the fifth factor of production is increasingly recognized as the engine of productivity and economic growth. And it has certain unique characteristics that distinguish it from physical labor. These are:
- Knowledge is expandable and self-generated: As an engineer or doctor gains more experience, their knowledge base will grow and
- Knowledge is portable and shareable: This means that it is easy to move and share. This transfer, however, does not prevent its use by the original owner.
It has been emphasized that knowledge resides in people’s minds, unsurprisingly, the reward for knowledge is wages or salaries.
Knowledge, entrepreneurship, labor, capital, and land have been described as factors of production that are necessary for any economic system to operate effectively. The rewards for these factors were highlighted.