- Land refers to natural resources, such as minerals, water or oil. They are any raw elements that are taken out of nature and transformed into a finished product. The costs associated with obtaining and converting land is known as rent. Economists argue that use and quality of land as a factor of production can be improved with better techniques and abatement of pollution leading to higher yield and increased quality.
- Most human efforts and contributions to a product or service are known as labor. Labor can refer to physically working to create a product, but it can also refer to the mental effort involved. The costs of labor are referred to as wages. Wages fluctuate given a number of factors, such as productivity and size of the labor pool. Since workers can learn and be trained, education greatly increases productivity and wages.
- Machinery, buildings and factories are all examples of capital. Capital is used to transform and process raw materials into a finished product. The cost associated with capital is interest, since most capital expenses require investment either in the form of a loan or foregoing earning interest in another investment. New technology and scientific research aid in the availability, use and productivity of capital as a factor or production.
- Land, labor and capital are the traditional factors of production. However, entrepreneurship is often included. Entrepreneurship refers to the producer of the goods and the one making the decisions on the mix of factors. As payment for these efforts, the entrepreneur earns profit from the sale of the products. The factor for entrepreneurship is also sometimes referred to as human capital.
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