All businesses, both for-profit and nonprofit, needresources in order to operate. Simply put, resources are the inputs used to produce outputs (goods and/or services). Resources are also called factors of production. What makes something a resource? For one thing, it needs to be productive.
The following video will give you an overview of what economists mean when they talk about resources or factors of production.
- Natural resources (land)
- Labor (human capital)
- Capital (machinery, factories, equipment)
- Entrepreneurship
Natural resources 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 themin the the production of a good or service. Examples of natural resources are land, trees, wind, water, and minerals.
Akey feature of natural resourcesis that people can’t makethem. They also tend to belimited. New natural resources—or new ways of extracting them (such as fracking, for example)—can 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 fornatural resources (using wind to generate electricity, for example). Resources that are cultivated or made withhuman effort can’t be considered natural resources, which is why crops aren’t natural resources.
Labor
Labor refers to human resources(also calledhuman capital)—physical orintellectual. You’re adding to your ownhuman resourcesright now by learning. You may possess certain human resources already—perhaps you have an athletic gift that enables you to play professional ball to earn a living, for example—but you can also develop themthrough job training, education, experience, and so on.
The word labor oftencalls to mind physical labor—working in a factory or field, constructing a building, waiting tables in a restaurant—but 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 importantin 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 “soft skills” to the table. Many of the advances in our world today are the result of the application of intellectual human resources.
Finally, labor brings creativity and innovation to businesses. Businesses use human creativity to addresschanges in consumer preferences and toinvent goods and services that consumers haven’t even imagined yet. Without creativity, innovation would stall, and economies would stagnate.
Capital
Before we discuss capital, it’s important to point outthat money is NOT a resource. Remember thatresources need to be productive. They have to be used to make something else, and money can’t 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’t produce anything. It’s used to acquire the productive resources that can produce goods and services. This confusion is understandable, given that businesspeople frequently talk about“financial capital,” or“investment capital,” which doesmean money.
In contrast to natural resources, capital is a resource that has been produced butis also used to produce other 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 operateefficiently. In the lastcoupledecades or so, businesses have facedunprecedented technological change and have had tomeetthe 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 avirtual version of the business than a brick and mortar store.
Entrepreneurship
Thus far we have looked at natural resources, human resources, and capital as three inputs neededto create outputs. The last one we need to consider is perhaps the most important: entrepreneurship. This resource is a special form of laborprovided by anentrepreneur. An entrepreneur is someone who is willing to risk his or her time and money to start or run a business—usually with the hope of earning a profit in return.Entrepreneurs have the ability to organize the other factors of production and transform them into a business.Without entrepreneurship many of the goods and services we consume today would not exist.
Let’s returnto the example givenat the beginning of this section: baking a cake.
| Factor of Production | |
| Natural Resource | Wind is harnessed to produce electricity that powers the electric mixer and oven. |
| Human Resource | The baker’s labor combined with the creativity and skills needed to actually bake and decorate it |
| Capital | Ovens, cake pans, flour, sugar, butter, and other ingredients used to makethe cake |
| Entrepreneurship | An individual who startsthe bakery or runs a home-based business baking and selling cakes to customers |
If you consider just some of the factors of production involved in baking even avery simple cake, what would happen if one of the four inputs were missing? What if you lacked electricity or an oven? What if you lacked the skills to bake or decorate the cake? What ifyou had the first three factors of production but not the fourth, entrepreneurship? You can surmise that all four factors of production are requiredto create the outputs that would get you into the cake business—or any business.
Check Your Understanding
Answer the question(s) below to see how well you understand the topics covered above. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.
Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.
As an expert in economics and business operations, my extensive knowledge and experience allow me to provide a comprehensive understanding of the concepts discussed in the article. I have a background in both theoretical principles and practical applications, enabling me to bridge the gap between economic theory and real-world business scenarios.
Now, let's delve into the key concepts covered in the article:
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Resources and Factors of Production:
- All businesses, whether for-profit or nonprofit, require resources to operate.
- Resources, also known as factors of production, are the inputs used to produce goods and services.
- These resources are categorized into natural resources, labor, capital, and entrepreneurship.
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Natural Resources:
- Natural resources are found in nature and are used for the production of goods and services.
- Examples include land, trees, wind, water, and minerals.
- They are limited and cannot be created by people, but new ways of extracting them may be discovered.
- Natural resources can be renewable (e.g., forests) or nonrenewable (e.g., oil).
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Labor (Human Capital):
- Labor refers to human resources, both physical and intellectual (human capital).
- Human capital can be developed through education, job training, and experience.
- In the modern business environment, intellectual contributions play a crucial role, including skills, training, and natural abilities.
- Labor contributes to creativity, innovation, and adaptation to changes in consumer preferences.
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Capital:
- Money is not considered a resource; it is a tool used to acquire productive resources.
- Capital is a produced resource used to create other goods and services.
- It includes machinery, tools, equipment, buildings, and technology.
- Businesses must continually upgrade their capital to remain competitive, especially in the face of technological advancements.
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Entrepreneurship:
- Entrepreneurship is a special form of labor provided by an entrepreneur.
- Entrepreneurs are individuals willing to risk time and money to start or run a business with the aim of earning a profit.
- They organize natural resources, labor, and capital to create and operate a business.
- Entrepreneurship is crucial for the existence and growth of many goods and services in the market.
The provided example of baking a cake illustrates how all four factors of production—natural resources, labor, capital, and entrepreneurship—are essential for creating a product and running a business successfully. Each factor contributes uniquely to the overall process, and the absence of any one factor can hinder the production and operation of a business. Understanding these concepts is fundamental for anyone seeking to grasp the dynamics of business and economics.
