Overview – Factors of production

From the discussion on the economic problem, we know it arises because wants and needs are unlimited and resources are scarce. In a market system, these scarce resources are mainly the following four factors of production: natural resources, labour, capital and entrepreneurship. Natural resources and labour are sometimes called primary factors of production, while capital and entrepreneurship are referred to as secondary factors of production.

These factors of production are important for two reasons: Without them, there can be no production of goods and services. Think about what is needed to produce a wooden table. You need the wood, equipment (a saw and hammer) and you need human resources (labour and entrepreneurship). A second reason why the factors of production are important in a market system is that it is from the ownership of the factors of production that households derive an income.

The factors of production therefore play a key role in solving the three fundamental questions of what to produce, how to produce it and for whom to produce it.