Factors of Production
The factors that are used to produce goods and services are known as factors of production. They are also known as inputs. Factor pricing is the payments for the services provided by factors of production like land, labor, capital, and entrepreneur. The reward for labor is known as wage. Also, the reward for land is rent. Likewise, the reward for capital is known as interest. Lastly, entrepreneurs receive profit as their reward. The price determination process of factors of production is known as factor pricing.
Land refers to the free gifts of nature to living beings like soil, forest, mountains, water, air, etc. The land is a fixed factor of production because it cannot be changed during the production process. Land receives rent for its contribution during production.
Labor refers to the mental and physical efforts of human beings to perform a particular task. Demand for labor depends on the marginal productivity of labor in relation to the wage rate. The supply of labor depends on the wage rate, population growth, expenses on drawing, education, nature of jobs, working environment, etc.
Capital goods are manmade objects as they are used in further production and add value to goods and services. Capital is a passive factor of production that should be activated by labor or others.
An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The entrepreneur is an innovator, a source of new ideas, goods, services, and business or procedures.