By economic resources we mean all natural, human, and manufactured resources that go into the production of goods and services. That includes all the factory and farm buildings and all the equipment, tools, and machinery used to produce manufactured goods and agricultural products; all transportation and communication facilities; all types of labour; and land and mineral resources. Economists classify all these resources as either property resources—land and raw materials and capital—or human resources— labour and entrepreneurial ability.
Land means much more to the economist than it does to most people. To the economist land includes all natural resources—all “gifts of nature”—that are used in the production process, such as arable land, forests, mineral and oil deposits, and water resources.
Capital (or capital goods or investment goods) includes all manufactured aids used in producing consumer goods and services—that is, all tools, machinery, and equipment, and factory, storage, transportation, and distribution facilities. The process of producing and purchasing capital goods is known as investment.
Capital goods differ from consumer goods in that consumer goods satisfy wants directly, while capital goods do so indirectly by aiding the production of consumer goods. Note that the term “capital” as used by economists does not refer to money, but to real capital—tools, machinery, and other productive equipment. Money produces nothing; it is not an economic resource. So-called “money capital” or “financial capital” is simply a means for purchasing real capital.
Labour is a broad term for all the physical and mental talents of individuals available and usable in producing goods and services. The services of a logger, retail clerk, machinist, teacher, professional football player, and nuclear physicist all fall under the general heading “labour.”
Finally, there is the special human resource, distinct from labour, that we label entrepreneurial ability. The entrepreneur performs several functions:
- The entrepreneur takes the initiative in combining the resources of land, capital, and labour to produce a good or a service. The entrepreneur is the driving force behind production and the agent who combines the other resources in what is hoped will be a successful business venture.
- The entrepreneur makes basic business-policy decisions—those non-routine decisions that set the course of a business enterprise.
- The entrepreneur is an innovator—the one who commercializes new products, new production techniques, or even new forms of business organization.
- The entrepreneur is a risk bearer. The entrepreneur in a market system has no guarantee of profit. The reward for the entrepreneur’s time, efforts, and abilities may be profits or losses. The entrepreneur risks not only his or her invested funds but those of associates and stockholders as well.Because these four resources—land, labour, capital, and entrepreneurial ability— are combined to produce goods and services, they are called the factors of production.
The land, labour, and entrepreneurial ability that are used in the production of goods and services.
Natural resources (“free gifts of nature”) used to produce goods and services.
Human-made resources (build¬ings, machinery, and equipment) used to produce goods and services.
Spending for the production and accumulation of capital and addi¬tions to inventories.
The physical and mental talents and efforts of people that are used to produce goods and services.
The human resources that combine the other resources to produce a product, make non-routine decisions, innovate, and bear risks.