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In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function .
Production can be either increased, decreased or remain constant as a result of consumption, amongst various other factors. The relationship between production and consumption is mirror against the economic theory of supply and demand. Accordingly, when production decreases more than factor consumption, this results in reduced productivity.
The production functions listed below, and their properties are shown for the case of two factors of production, capital (K), and labor (L), mostly for heuristic purposes. These functions and their properties are easily generalizable to include additional factors of production (like land, natural resources, entrepreneurship, etc.)
Physical capital consists of man-made goods (or input into the process of production) that assist in the production process. Cash, real estate, equipment, and inventory are examples of physical capital. [1] Capital goods represents one of the key factors of corporation function.
The inputs to the production function are commonly termed factors of production and may represent primary factors, which are stocks. Classically, the primary factors of production were land, labour and capital. Primary factors do not become part of the output product, nor are the primary factors, themselves, transformed in the production process.
The social means of production are capital goods and assets that require organized collective labor effort, as opposed to individual effort, to operate on. [7] The ownership and organization of the social means of production is a key factor in categorizing and defining different types of economic systems.
They are often used as manufacturing systems or services themselves. Examples include hand tools, machine tools, data centers, oil rigs, semiconductor fabrication plants, and wind turbines. Their production is often organized in projects, with several parties cooperating in networks. [8] [9] This is what makes it a factor of production:
For example, if the demand for a good such as wheat increases, then this leads to an increase in the demand for labour, as well as demand for other factors of production such as fertilizer. For another example, demand for steel leads to derived demand for steel workers, as steel workers are necessary for the production of steel.