Factors of production are various types of resources used in the production of goods and services. They are:
- Land (natural resource) – natural resources used in the creation of products, paid in economic rent, because they are simply irreproduceable.
- Labor – human efforts provided in the creation of products, paid in wage.
- Capital goods – human-made goods or means of production (including machinery, building and so forth) used in the production of other goods, paid in interest.
Income from exploiting the 3 production factors comprises the national income.
Capital and labor are active factors while land is passive. One can only shift capital and labor rather than land which is given limited, to get a production-factor combination, which is further reflected in the technology a firm employs to produce products and services.
Labor operates capital to produce. The ratio of labor over capital is a major decision almost all firms must make. In the decision process, decision makers must understand that neither too much labor per unit of capital nor too much capital per unit of labor is acceptable since either way efficiency is not achieved. The 2 factors must come around someplace that both of them contribute equally to the final economic value realized.