Factor of production

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Factor of production (also called expenditure) is any kind of goods or services used in the production process.

Production factors are: work done by the employee, car park, manager's wage, electricity, Internet etc.


In the classic economic approach we can distinguish the basic factors of production, such as:

  • labor - human effort that is put in the production of goods or services
  • capital - good previously produced, resources, machinery, buildings, infrastructure, knowledge and experience
  • ground - good of natural origin held by the owner, for example: land, minerals, goods of natural origin

Factors of production impact on management

On the basis of the available factors of production and prices, the company can determine best production technology at given moment. Technology that uses the most capital is called a capital intensive, while technology demanding large number of humans work is labor intensive.

Along with the changes in prices of the factors of production the company uses substitution effect to selects the relevant quantities of the factors of production to minimize overall costs.

Factors of production can also be divided into fixed and variable.

  • Fixed factor of production - may not be changed in short term.
  • Variable factor of production - quantity can be changed even in the short term.