Four factors of production | AP Microeconomics | Khan Academy

Four factors of production | AP Microeconomics | Khan Academy

– [Instructor] An idea
that will keep coming up as you study economics is
the idea of the four factors of production, which are
usually listed as land, labor, capital, and entrepreneurship. And the idea here is if you
want to produce anything, so let’s just say this circle
is the production process, and this arrow is the
output, you need inputs. Now, you might have
many, many, many inputs. You might need supplies,
you might need a factory, you might need people
to work in the factory, you need all of these different things. But the idea of the four
factors of production is that these things can all be classified in one of these four
groups, as either land, labor, capital, or entrepreneurship. Now, these words have
meaning in everyday language. And so, some of it might jump out at you. Of course, if you need to build factory or if you need to farm,
you need land to do so. And you can see that in this example here, where we see a farm. Clearly, the need a lotta land
in order to have the farm. Even in a garment
factory, this is a picture of a garment factory from
maybe a hundred years ago, even there, they needed land
on which to build the factory. So, this floor is sitting on land. And land doesn’t just have to strictly mean land in an economics context. It can mean natural resources in general. This could be things like
water or air or energy. So, in some contexts, instead of land, some people might say natural resources for this first factor of production. Now, another important
factor of production, and arguably they’re all
important, is the idea of labor. To produce many or most things,
someone has to work on it. So, someone had to plant these seeds, and they will have to harvest these crops. The labor is very clear here. You see people putting in work in order to produce the
product right over there. Now, capital is an interesting one. It means one thing in everyday language, and it means something
slightly more specific when we talk about it
in an economics context. In an economic context, capital is something produced to
produce other things. So, examples of capital would be tools that you use to produce other things. It could be a building that you need in order to produce other things. It could be the machinery in a factory. So, in these two pictures,
there’s many examples of capital. You could view this table and the tools that these folks are
using, that is capital. You could use, you could view
the whole building itself and all of the light fixtures
and all of that as capital. So, all of this stuff is capital. The hangers that they’re
putting the coats on after they produce it, that is capital. In this farm example, the
capital would be the buildings. These were constructed so that they could produce the food from the farm. This little, it looks like
some type of machinery there, that is capital for the farm. It’s being used to produce
the output of the farm. Now, the place that that’s
different than everyday language, in everyday language, when
people talk about capital, they’ll often include financial capital, financial assets that could be used to get benefit in the
future, things like money. But in an economic context, we are not considering financial assets, we’re only thinking about
things that were produced in order to produce other things. The fourth factor of
production is entrepreneurship. Entrepreneurship, in our everyday language means putting things together so you’re trying to create other things. When someone’s an entrepreneur, you might imagine someone who’s
trying to start a business. In an economic context,
it has a related idea. Entrepreneurship is putting together all of the other factors of production so that you can actually produce things. You can’t just randomly build buildings and randomly plant seeds. Someone has to think about
how do you put these things together so that you can produce
things in a reasonable way? And obviously, you wanna
produce as much as possible given the other factors that you are putting into the production. A related idea, and it sometimes
is used interchangeably in an economics course, is technology. So, sometimes, you’ll see the
four factors of production as land, labor, capital,
and entrepreneurship; and sometimes, you’ll see it listed as land, labor, capital, and technology. But when you see this, when you see technology as a factor of production, don’t think about it as
technology in everyday language, where you think of
computer chips or software. When people are talking about technology as a factor of production, they are really talking
about entrepreneurship. They’re talking about the
know-how of putting together the other factors of production in order to produce that output. Finally, I wanna leave on one idea, the idea of the two types
of things that could be produced from all of these
factors of production. Broadly speaking, we
could produce something that could be used to produce more things, and we already talk about it. We could be, in that situation,
be producing capital goods. So, that could be that we
are constructing a factory that itself maybe produces
tools for other people to use in some other production process. The other option we have is to produce what are known as consumption goods. Consumption goods. Consumption goods are
goods that are just used. It might make people happy,
they might find pleasure in it, but it’s not being used
to produce other things. And because our production
resources are scarce, there’s a trade-off when
a society or a factory or whoever decides how
much capital to produce versus how much consumption goods. You need some consumption goods; otherwise, frankly, we
wouldn’t have clothing on. We wouldn’t be eating nice meals. We wouldn’t be able to enjoy our lives. But at the same time,
you also need capital. If we did only consumption
goods, at some point, we wouldn’t have all the things we need to produce the consumption goods. So, it’s a very interesting trade-off that we’ll explore more in future videos.


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