5 Production factors

Economic systems rely on certain inputs to function effectively. Taken together, these inputs are called production factors. These are the resources companies use to create wealth. There are five factors of production: land, labor, capital, entrepreneurship and knowledge. While knowledge is as old as humanity, it is only recently that it has been recognized as a factor of production. Here are some tips to help you understand the five factors of production:


Work refers to all natural resources. It includes things that exist in the natural environment of the human being that can be used to produce goods and services. Examples include the soil itself (which forms the place where the business is located), climate, vegetation, water and mineral deposits. The reward for land is rent.


Work is another input from production. It refers to human effort both mentally and physically directed towards the production of goods and services. Among contemporary writers and scholars, labor is separated from entrepreneurship and knowledge. The reward for work is salary or salary.


Capital refers to all man-made productive assets used for further production. These productive assets are not wanted for their own sake (the satisfaction they give) but because they help produce other raw materials. To better appreciate this input of production, we classify it into two forms: capital goods and capital funds. The former consists of things such as tools, equipment, buildings, furniture, means of transport and raw materials in the manufacturing process and inventory for sale. Capital funds, on the other hand, refer to money or cash available for investment in business enterprises. It can take the form of shares, shares, loans and bonds. The reward for capital is interest.


Entrepreneurship has been separated from labor because workers cannot make a contribution without the entrepreneur. Workers must find work to make a contribution, and the entrepreneur makes this job available. Without entrepreneurs, all other factors of production are of little economic value. The entrepreneur identifies a business opportunity, organizes the other factors and assumes the risk of success or failure of the business enterprise.

Entrepreneurship, quite simply, is the exploitation of opportunities that exist in a market through the combination of other factors of production. The rewards for entrepreneurship are merit.


We have distinguished this factor, knowledge, because it is increasingly recognized as an important factor in modern business. It differs from work. It is a critical and meaningful resource in any economy. Knowledge is fluid. It can be captured, codified and transmitted. While others cannot be fully formulated, for example, skills and competences (tacit knowledge) can only be cut through interaction with people and the environment. Knowledge is in the holder or acquaintance, and when 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 used in the consciousness of the known. In organizations, it is often embedded not only in documents or repositories, but also in organizational routines, processes, practices and norms. (Davenport & Prusak, 1998: 5)

Knowledge as the fifth factor of production is increasingly recognized as the driving force for productivity and economic growth. And it has certain unique characteristics that differentiate it from physical work. These are:

  • Knowledge is expandable and self-generating: As an engineer or physician gains more experience, his knowledge base will increase, and
  • Knowledge is transportable and shareable: it means it can be easily moved and shared. However, this transfer does not prevent the use of the original holder.

It has been emphasized that knowledge lies in the minds of the people and expected that the reward for knowledge is salary or salary.

Knowledge, entrepreneurship, labor, capital, and land have described as factors of production necessary in any economic system to operate effectively. The rewards for these factors were highlighted.