2.7: Factors of Production: The Building Blocks of Business

To provide goods and services, regardless of whether they operate in the for-profit or not-for-profit sector, organizations require inputs in the form of resources called factors of production. Four traditional factors of production are common to all productive activity: natural resources, labour (human resources), capital, and entrepreneurship. Many experts now consider knowledge to be the fifth factor, acknowledging its key role in business success (shown in Figure 2.3). By using the factors of production efficiently, a company can produce more goods and services with the same resources.

Natural Resources

Commodities that are useful inputs in their natural state are known as natural resources, and these can be either renewable or non-renewable. Renewable natural resources are those that can grow again or can never run out, and these include trees, water, air, and sources of power like solar and wind energy. Non-renewable natural resources are found in the ground, and there are limitations to their availability as they cannot be replaced or renewed. These include land,  mineral and oil deposits. Sometimes natural resources are simply called land, although the term means more than just land. Companies use natural resources in different ways. The International Paper Company uses wood pulp to make paper, and Pacific Gas & Electric Company may use water, oil, or coal to produce electricity. Today, urban sprawl, pollution, and limited resources have raised questions about resource use. Conservationists, environmentalists, and government bodies are proposing laws to require land-use planning and resource conservation.

Human Resources

Labour, or human resources, refers to the economic contributions of people working with their minds and muscles. This input includes everyone’s talents, from a restaurant cook to a nuclear physicist, who performs the many tasks of manufacturing and selling goods and services.

Capital

The tools, machinery, equipment, and buildings used to produce goods and services and get them to the consumer are known as capital. Sometimes, the term capital is also used to refer to the money that buys machinery, factories, and other production and distribution facilities. However, because money itself produces nothing, it is not one of the basic inputs. Instead, it is a means of acquiring the inputs. Therefore, in this context, capital does not include money.

Entrepreneurs

Entrepreneurs are the people who combine the inputs of natural resources, labour, and capital to produce goods or services with the intention of making a profit or accomplishing a not-for-profit goal. These people make the decisions that set the course for their businesses; they create products and production processes or develop services. Because they are not guaranteed a profit in return for their time and effort, they must be risk-takers. Of course, if their companies succeed, the rewards may be great. Today, many individuals want to start their own businesses. They are attracted by the opportunity to be their own boss and reap the financial rewards of a successful firm. Many start their first business from their dorm rooms, such as Mark Zuckerberg of Facebook, or while living at home, so their costs are almost zero. Entrepreneurs include people such as Amazon founder and chairman Jeff Bezos, who was named the second richest person in the world in 2025.^[1] Many thousands of individuals have started companies that, while remaining small, make a major contribution to the economy.

Knowledge

A number of outstanding managers and noted academics are beginning to emphasize a fifth factor of production — knowledge. Knowledge refers to the combined talents and skills of the workforce and has become a primary driver of economic growth. Today’s competitive environment places a premium on knowledge and learning over physical resources.

Media Attributions

“Figure 2.3: The five factors of production — natural resources, human resources, capital, entrepreneurs, and knowledge” is adapted from Chapter 2: Business Concepts and Teamwork in Business Fundamentals, 1st Edition, © Kerri Sheilds, licensed under CC BY-NC-SA.