Importance of Teamwork & Professional Development
Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” “The Constantian” and “The Social Justice Review.”
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Why Are the Factors of Production Important to Economic Growth?
Economic growth is the increase in the production of goods and services from one period to the next. As such, the value of these goods and services increases, resulting in larger corporate profits.
But how does economic growth work and what factors affect it? It only comes by increasing the quality and quantity of the factors of production, which are the resources used in creating or manufacturing a good or service. Keep reading to learn more about these four factors—land, labor, capital, and entrepreneurship—and what makes them so important.Key TakeawaysEconomic growth is the increase in the production of goods and services over a period of time and is dependent on the four factors of production.Land is defined as agricultural land, commercial real estate, and natural resources, such as oil, gas, and other commodities.Labor is made up of the individuals who are responsible for the development of goods and services.Capital goods, such as tools, equipment, and machinery, are part of the capital category.The final factor of production is entrepreneurship, which includes the visionaries and innovators who are behind the production process.
Understanding the Factors of Production
The factors of production are inputs that companies need to develop goods and services. This enables them to earn profits. The concept of these factors dates back to neoclassical economics, combining historic economic theories with other ideas, such as the idea of labor. As noted above, the four factors of production are land, labor, capital, and entrepreneurship. As the Federal Reserve Bank of St. Louis puts it:”Factors of production are resources that are the building blocks of the economy; they are what people use to produce goods and services.”
We highlight what each of these means below.Land
When most people think of land, they automatically assume it means agricultural land. While that’s true, it isn’t the only thing that makes up this factor. Land doesn’t just refer to natural resources, but it can also include commercial real estate and renewable resources like forests. Producers also use natural resources that come from the earth, which also fit into this category. These resources include:Oil and gasCoalSilver, copper, and other metalsOther commodities
Land is generally considered one of the most important factors of production. Certain industries rely on land more than others. For instance, a real estate developer needs it to make good on its investments. But technology companies and those that rely on automation tend to rely less on land, making it a less significant factor of production.Labor
Labor consists of the people who are responsible for the creation of goods and services (from beginning to end) and the effort they put forth. These individuals include factory workers, managers, salespeople, and engineers who design the machinery used in production. As such, it can take on many forms. For instance, the effort of construction workers who work on a building site and quality control workers who ensure products are ready to go to market make up this category.
Individuals are compensated for their time and effort, and the amount they are paid depends on the skills they bring to the table. People with fewer skills and training tend to earn lower wages while people who are educated and highly skilled often get paid more.
Innovation, though, is changing the labor force. Automation, increased technology, and equipment are putting a dent into the need for workers. Companies that continue to innovate their production processes rely less on human labor. For instance, the invention and availability of equipment cut the need for physical laborers on farms.