{"id":5619,"date":"2016-06-07T17:21:08","date_gmt":"2016-06-07T17:21:08","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/masterybusiness2xngcxmasterspring2016\/?post_type=chapter&#038;p=5619"},"modified":"2024-05-02T19:29:40","modified_gmt":"2024-05-02T19:29:40","slug":"reading-factors-of-production","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-introductiontobusiness\/chapter\/reading-factors-of-production\/","title":{"raw":"Factors of Production","rendered":"Factors of Production"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>List the four factors of production<\/li>\r\n \t<li>Explain the four factors of production<\/li>\r\n<\/ul>\r\n<\/div>\r\nAll businesses, both for-profit and nonprofit, need\u00a0resources in order to operate. Simply put, resources are the <strong>inputs<\/strong> used to produce <strong>outputs<\/strong> (goods and\/or services). Resources are also called <strong>factors of production<\/strong>. What makes something a resource? For one thing, it needs to be <em>productive<\/em>.\u00a0<em>\u00a0<\/em>\r\n\r\nThere are four categories of resources, or factors of production:\r\n<ul>\r\n \t<li>Natural resources (land)<\/li>\r\n \t<li>Labor (human capital)<\/li>\r\n \t<li>Capital (machinery, factories, equipment)<\/li>\r\n \t<li>Entrepreneurship (somebody who recognizes a profit opportunity)<\/li>\r\n<\/ul>\r\n<h2>Natural Resources<\/h2>\r\n<strong>Natural resources<\/strong> have two fundamental characteristics: (1) they are found in nature, and (2) they can be used for the production of goods and services. In order to provide benefit, people first have to discover them and then figure out how to use them\u00a0in the production of a good or service. Examples of natural resources are land, trees, wind, water, and minerals.\r\n\r\nA\u00a0key feature of natural resources\u00a0is that people can't make\u00a0them. They also tend to be\u00a0limited. New natural resources\u2014or new ways of extracting them (such as fracking, for example)\u2014can be discovered, though. These natural resources can be renewable, such as forests, or nonrenewable, such as oil or natural gas. It's also possible to invent new uses for\u00a0natural resources (using wind to generate electricity, for example). Resources that are cultivated or made with\u00a0human effort can't be considered <em>natural<\/em> resources, which is why crops aren't natural resources.\r\n<h2>Labor<\/h2>\r\n<strong>Labor<\/strong> refers to human resources\u00a0(also called\u00a0human capital)\u2014physical or\u00a0intellectual. You\u2019re adding to your own\u00a0human resources\u00a0right now by learning. You may possess certain human resources already\u2014perhaps you have an athletic gift that enables you to play professional sports to earn a living, for example\u2014but you can also develop them\u00a0through job training, education, experience, and so on.\r\n\r\nThe word <em>labor<\/em> often\u00a0calls to mind physical labor\u2014working in a factory or field, constructing a building, waiting tables in a restaurant\u2014but it can refer to any human input (paid or unpaid) involved in the production of a good or service. This broader definition of labor is particularly important\u00a0in today's technology-driven business environment, which has come to rely much more on the intellectual contributions of the labor force than the physical labor required of, say, working in a production line. Intellectual contributions include experience in and out of school, training, skills, and natural abilities. In order to remain competitive, businesses place a premium on employees who bring these \u201chard skills\u201d to the table. Many of the advances in our world today are the result of the application of intellectual human resources.\r\n\r\nFinally, labor brings creativity and innovation to businesses. Businesses use human creativity to address\u00a0changes in consumer preferences and to\u00a0invent goods and services that consumers haven't even imagined yet. Without creativity, innovation would stall, and economies would stagnate.\r\n<h2>Capital<\/h2>\r\nBefore we discuss <strong>capital<\/strong>, it\u2019s important to point out\u00a0that money is <em>not<\/em> a resource. Remember that\u00a0resources need to be <em>productive<\/em>. They have to be used to make something else, and money can\u2019t do that. Money certainly helps the economy move along more efficiently and smoothly, like grease for the economic machine. But in and of itself, it can\u2019t produce anything. It\u2019s used to acquire the productive resources that can produce goods and services. This confusion is understandable, given that businesspeople frequently talk about\u00a0\"financial capital,\" or\u00a0\"investment capital,\" which does\u00a0mean money.\r\n\r\nIn contrast to natural resources, capital is a resource that <em>has been<\/em> produced but\u00a0is also used to produce <em>other<\/em> goods and services. This factor of production includes machinery, tools, equipment, buildings, and technology. Businesses must constantly upgrade their capital to maintain a competitive edge and operate\u00a0efficiently. In the last\u00a0couple\u00a0decades or so, businesses have faced\u00a0unprecedented technological change and have had to\u00a0meet\u00a0the demands of consumers, whose lives increasingly take place in a virtual world. Almost every business has a Web presence, and many customers are more accustomed to interacting with a\u00a0virtual version of the business than a brick and mortar store.\r\n<h2>Entrepreneurship<\/h2>\r\nThus far, we have looked at natural resources, human resources, and capital as three inputs needed\u00a0to create outputs. The last one we need to consider is perhaps the most important: <strong>entrepreneurship<\/strong>. This resource is a special form of labor\u00a0provided by an\u00a0entrepreneur. An entrepreneur is someone who is willing to risk his or her time and money to start or run a business\u2014usually with the hope of earning a profit in return.\u00a0Entrepreneurs have the ability to organize the other factors of production and transform them into a business.\u00a0Without entrepreneurship, many of the goods and services we consume today would not exist.\r\n\r\nThe following video will give you an overview of what economists mean when they talk about resources or factors of production.\r\n\r\nhttps:\/\/youtu.be\/0PgP0dXAGAE\r\n\r\nYou can <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Intro+to+Business\/Transcriptions\/Episode3Resources_transcript.txt\" target=\"_blank\" rel=\"noopener\">view the transcript for \"Episode 3: Resources\" (opens in new window).<\/a>\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/54d4837b-120f-4b8e-884b-35305606d6e2\r\n\r\n<\/div>\r\n<div class=\"textbox examples\">\r\n<h3>Baking a Cake<\/h3>\r\nLet\u2019s take a look at an example: baking a cake. What factors go into the production of a cake?\r\n<table><caption>Table 1. Factors of Production<\/caption>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Natural Resource<\/th>\r\n<td>Wind is harnessed to produce electricity that powers the electric mixer and oven.<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Labor<\/th>\r\n<td>The baker's labor combined with the creativity and skills needed to actually bake and decorate it<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Capital<\/th>\r\n<td>Ovens, cake pans, flour, sugar, butter, and other ingredients used to make\u00a0the cake<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Entrepreneurship<\/th>\r\n<td>An individual who starts\u00a0the bakery or runs a home-based business baking and selling cakes to customers<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf you consider just <em>some<\/em> of the factors of production involved in baking even a\u00a0very simple cake, what would happen if one of the four inputs was missing? What if you lacked electricity or an oven? What if you lacked the skills to bake or decorate the cake? What if\u00a0you had the first three factors of production but not the fourth, entrepreneurship? You can surmise that <strong>all four<\/strong> factors of production are required\u00a0to create the outputs that would get you into the cake business\u2014or any business.\r\n\r\n<\/div>\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/a7b3291e-8312-432c-a6fd-8f670ec502d8\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>List the four factors of production<\/li>\n<li>Explain the four factors of production<\/li>\n<\/ul>\n<\/div>\n<p>All businesses, both for-profit and nonprofit, need\u00a0resources in order to operate. Simply put, resources are the <strong>inputs<\/strong> used to produce <strong>outputs<\/strong> (goods and\/or services). Resources are also called <strong>factors of production<\/strong>. What makes something a resource? For one thing, it needs to be <em>productive<\/em>.\u00a0<em>\u00a0<\/em><\/p>\n<p>There are four categories of resources, or factors of production:<\/p>\n<ul>\n<li>Natural resources (land)<\/li>\n<li>Labor (human capital)<\/li>\n<li>Capital (machinery, factories, equipment)<\/li>\n<li>Entrepreneurship (somebody who recognizes a profit opportunity)<\/li>\n<\/ul>\n<h2>Natural Resources<\/h2>\n<p><strong>Natural resources<\/strong> have two fundamental characteristics: (1) they are found in nature, and (2) they can be used for the production of goods and services. In order to provide benefit, people first have to discover them and then figure out how to use them\u00a0in the production of a good or service. Examples of natural resources are land, trees, wind, water, and minerals.<\/p>\n<p>A\u00a0key feature of natural resources\u00a0is that people can&#8217;t make\u00a0them. They also tend to be\u00a0limited. New natural resources\u2014or new ways of extracting them (such as fracking, for example)\u2014can be discovered, though. These natural resources can be renewable, such as forests, or nonrenewable, such as oil or natural gas. It&#8217;s also possible to invent new uses for\u00a0natural resources (using wind to generate electricity, for example). Resources that are cultivated or made with\u00a0human effort can&#8217;t be considered <em>natural<\/em> resources, which is why crops aren&#8217;t natural resources.<\/p>\n<h2>Labor<\/h2>\n<p><strong>Labor<\/strong> refers to human resources\u00a0(also called\u00a0human capital)\u2014physical or\u00a0intellectual. You\u2019re adding to your own\u00a0human resources\u00a0right now by learning. You may possess certain human resources already\u2014perhaps you have an athletic gift that enables you to play professional sports to earn a living, for example\u2014but you can also develop them\u00a0through job training, education, experience, and so on.<\/p>\n<p>The word <em>labor<\/em> often\u00a0calls to mind physical labor\u2014working in a factory or field, constructing a building, waiting tables in a restaurant\u2014but it can refer to any human input (paid or unpaid) involved in the production of a good or service. This broader definition of labor is particularly important\u00a0in today&#8217;s technology-driven business environment, which has come to rely much more on the intellectual contributions of the labor force than the physical labor required of, say, working in a production line. Intellectual contributions include experience in and out of school, training, skills, and natural abilities. In order to remain competitive, businesses place a premium on employees who bring these \u201chard skills\u201d to the table. Many of the advances in our world today are the result of the application of intellectual human resources.<\/p>\n<p>Finally, labor brings creativity and innovation to businesses. Businesses use human creativity to address\u00a0changes in consumer preferences and to\u00a0invent goods and services that consumers haven&#8217;t even imagined yet. Without creativity, innovation would stall, and economies would stagnate.<\/p>\n<h2>Capital<\/h2>\n<p>Before we discuss <strong>capital<\/strong>, it\u2019s important to point out\u00a0that money is <em>not<\/em> a resource. Remember that\u00a0resources need to be <em>productive<\/em>. They have to be used to make something else, and money can\u2019t do that. Money certainly helps the economy move along more efficiently and smoothly, like grease for the economic machine. But in and of itself, it can\u2019t produce anything. It\u2019s used to acquire the productive resources that can produce goods and services. This confusion is understandable, given that businesspeople frequently talk about\u00a0&#8220;financial capital,&#8221; or\u00a0&#8220;investment capital,&#8221; which does\u00a0mean money.<\/p>\n<p>In contrast to natural resources, capital is a resource that <em>has been<\/em> produced but\u00a0is also used to produce <em>other<\/em> goods and services. This factor of production includes machinery, tools, equipment, buildings, and technology. Businesses must constantly upgrade their capital to maintain a competitive edge and operate\u00a0efficiently. In the last\u00a0couple\u00a0decades or so, businesses have faced\u00a0unprecedented technological change and have had to\u00a0meet\u00a0the demands of consumers, whose lives increasingly take place in a virtual world. Almost every business has a Web presence, and many customers are more accustomed to interacting with a\u00a0virtual version of the business than a brick and mortar store.<\/p>\n<h2>Entrepreneurship<\/h2>\n<p>Thus far, we have looked at natural resources, human resources, and capital as three inputs needed\u00a0to create outputs. The last one we need to consider is perhaps the most important: <strong>entrepreneurship<\/strong>. This resource is a special form of labor\u00a0provided by an\u00a0entrepreneur. An entrepreneur is someone who is willing to risk his or her time and money to start or run a business\u2014usually with the hope of earning a profit in return.\u00a0Entrepreneurs have the ability to organize the other factors of production and transform them into a business.\u00a0Without entrepreneurship, many of the goods and services we consume today would not exist.<\/p>\n<p>The following video will give you an overview of what economists mean when they talk about resources or factors of production.<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"Episode 3: Resources\" width=\"500\" height=\"375\" src=\"https:\/\/www.youtube.com\/embed\/0PgP0dXAGAE?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>You can <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Intro+to+Business\/Transcriptions\/Episode3Resources_transcript.txt\" target=\"_blank\" rel=\"noopener\">view the transcript for &#8220;Episode 3: Resources&#8221; (opens in new window).<\/a><\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_54d4837b-120f-4b8e-884b-35305606d6e2\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/54d4837b-120f-4b8e-884b-35305606d6e2?iframe_resize_id=assessment_practice_id_54d4837b-120f-4b8e-884b-35305606d6e2\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<div class=\"textbox examples\">\n<h3>Baking a Cake<\/h3>\n<p>Let\u2019s take a look at an example: baking a cake. What factors go into the production of a cake?<\/p>\n<table>\n<caption>Table 1. Factors of Production<\/caption>\n<tbody>\n<tr>\n<th scope=\"row\">Natural Resource<\/th>\n<td>Wind is harnessed to produce electricity that powers the electric mixer and oven.<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Labor<\/th>\n<td>The baker&#8217;s labor combined with the creativity and skills needed to actually bake and decorate it<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Capital<\/th>\n<td>Ovens, cake pans, flour, sugar, butter, and other ingredients used to make\u00a0the cake<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Entrepreneurship<\/th>\n<td>An individual who starts\u00a0the bakery or runs a home-based business baking and selling cakes to customers<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>If you consider just <em>some<\/em> of the factors of production involved in baking even a\u00a0very simple cake, what would happen if one of the four inputs was missing? What if you lacked electricity or an oven? What if you lacked the skills to bake or decorate the cake? What if\u00a0you had the first three factors of production but not the fourth, entrepreneurship? You can surmise that <strong>all four<\/strong> factors of production are required\u00a0to create the outputs that would get you into the cake business\u2014or any business.<\/p>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_a7b3291e-8312-432c-a6fd-8f670ec502d8\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/a7b3291e-8312-432c-a6fd-8f670ec502d8?iframe_resize_id=assessment_practice_id_a7b3291e-8312-432c-a6fd-8f670ec502d8\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-5619\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Factors of Production. <strong>Authored by<\/strong>: Linda Williams and Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Practice Questions. <strong>Authored by<\/strong>: Robert Danielson. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Episode 3: Resources. <strong>Authored by<\/strong>: Dr. Mary J. McGlasson. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/0PgP0dXAGAE\">https:\/\/youtu.be\/0PgP0dXAGAE<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-nd\/4.0\/\">CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives <\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":26,"menu_order":7,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Factors of Production\",\"author\":\"Linda Williams and Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Episode 3: Resources\",\"author\":\"Dr. Mary J. 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