Factor of production

In economics, factor of production is an input into the production process that is used to produce output.

Examples of factors of production

Labor - Labor is the term which describes how many workers that are used when producing a good. For example, a barista is an example of labor input for a coffee shop.

Capital - Capital is the term which is used to describe the physical machinery and tools which are used to produce a good. For example, the coffee machine, point of sales machine and the building are all examples of capital used for a coffee shop. It is important to note that capital does not mean financial capital which is the term used to describe the money invested into the business.

Land - Land is the physical land that is used for the production of the good. Land plays an important role in producing agricultural goods, as more land is needed to produce more output. However, plays a lesser role in the production of other goods such as manufactured commodities.

Factor shares

Factor share is the share of production given to each factor. For example, the factor share for labor is the wage rate multiplied by the amount of labor used divided by total output.

For example, suppose that a firm produces $100 worth of output. Suppose that labour is paid $60 and the owners of capital are paid $40.

Factor share of labor = $60 ÷ $100 = 0.6

Factor share of capital = $40 ÷ $100 = 0.4