This resulted in an influx of workers into cities, where they were able to (or were forced to) sell their labor to employers. In England peasants were evicted from rural areas so that nobles could use the land to pasture their sheep, whose wool had become a profitable commodity. These changes took different forms in different countries, but they combined to pave the way for capitalism. Since workers were subject to the command of rulers, their tools did not function to create wealth in the same way that capital does.Ī variety of historical and economic circumstances converged to bring the factors of production into being in Europe beginning in the sixteenth century. Those who controlled the land controlled not just the natural resources but also the very people who lived on the land, and those in control had the authority to regulate the work these people did. Though the ancient and medieval worlds had land, workers, and tools for producing goods and services, these things were controlled by central authority figures, such as kings and the elite classes of society, so that they could not be mobilized in the pursuit of wealth. In fact the factors of production probably did not exist in any arrangement that could sustain capitalism before the sixteenth century. When Did It BeginĬapitalism, the economic system in which individuals own property and can compete freely for profits, could not exist without the factors of production. Economists study how these choices are made and how they might be made differently. In a market economy these choices emerge from the interactions of countless individual buyers and sellers competing with one another for profit and economic well-being. All societies must make choices about how to use resources. Since no economy has an unlimited supply of the factors of production, it is not possible to satisfy all of a population’s wants and needs. On a national scale the study of economics looks at problems related to the scarcity of resources, among other things. The profitability of the paper company depends not simply on the presence and quality of its land, labor, and capital but also on the decisions made about how to employ these resources. An entrepreneur is someone with the creative ability required to organize the other factors of production in ways that produce profits. Others consider entrepreneurship a form of labor or capital. Some economists include a fourth category among the factors of production: entrepreneurship. Sometimes capital is also defined to include the money used to buy such equipment and to start and maintain business operations. The paper company’s factory, machinery, office building, and delivery trucks would be examples of capital. The labor needs of a paper company would probably differ substantially from the labor needs of a computer company, even if both needed the same number of employees.Ĭapital refers to the human-made equipment required to produce goods and services. Labor includes not just the number of employees but also the various abilities called for from workers. The factory workers, office workers, marketing staff, and sales staff of the paper company would all be considered labor. Labor refers to the workers necessitated to produce goods and services. All of these things are alike in that they are provided by nature rather than made by humans. In economics, terms as various as gold, soil, forests, oil, coal, air, lakes, rivers, wildlife, fish, the sun, and even outer space fall under the heading of land. Among the resources that the paper company requires, the trees and water used to make paper would be classified as land, as would the ground on which the factory, warehouse, and office buildings are located. Land refers to all of the natural resources that businesses need to make and distribute goods and services. Though the number and variety of the different resources businesses require is limitless, economists divide the factors of production into three basic categories: land, labor, and capital. Together, these resources constitute the factors of production necessary for the paper company to do business. Some of these items, such as workers’ skills, might be intangible. It might need thousands more resources of varying size and cost. It might require a thousand workers to run the factory, take orders, market (or sell) the paper, and deliver it to wholesalers or retail stores. A paper company might need, among many other things, trees, water, a large factory full of heavy machinery, a warehouse, an office building, and delivery trucks. In economics the term factors of production refers to all the resources required to produce goods and services. Factors of Production: Land, Labor, Capital What It Means
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