Economic systems depend on certain inputs to operate effectively. Together, these inputs are called factors of production. They are the resources that companies use to create wealth. There are five factors of production: land, labor, capital, entrepreneurship, and knowledge. While knowledge is as old as mankind, it has only recently been recognized as a factor of production. Here are some tips to help you understand the five factors of production:

Land

Work refers to all natural resources. It included things that are found in man’s natural environment and that can be used to produce goods and services. Examples include the land itself (which forms the site of the business), climate, vegetation, water, and mineral deposits. The reward for land is rent.

Plowing

Labor is another input to production. It refers to human efforts, both mental and physical, aimed at the production of goods and services. Among contemporary writers and scholars, work is distinguished from entrepreneurship and knowledge. The reward for work is wages or salaries.

Capital

Capital refers to all man-made productive assets that are used to promote production. These productive assets are not desired for themselves (the satisfaction they produce), but because they help produce other commodities. To better appreciate this production input, we classify it in two ways: capital good and capital fund. The former consists of such things as tools, equipment, buildings, accessories, means of transportation, as well as raw materials in manufacturing and inventory for sale. Equity fund, on the other hand, refers to money or cash that is available to invest in business ventures. It could be in the form of stocks, shares, loans, and bonds. The reward for principal is interest.

Entrepreneurship

Entrepreneurship has been distinguished from work because workers cannot make a contribution without the employer. Workers need to find work in order to make a contribution, and the employer makes this work available. Without the entrepreneur, all other factors of production have little economic value. The entrepreneur identifies a business opportunity, organizes the other factors, and assumes the risks of success or failure of the business venture.

Entrepreneurship, in short, is the exploitation of opportunities that exist within a market through the combination of other factors of production. The reward for entrepreneurship is profit.

Knowledge

We have distinguished this factor, knowledge, because it is increasingly recognized as a vital factor in contemporary business. It is different from work. It is a fundamental and significant resource in any economy. Knowledge is fluid. It can be captured, encoded and transmitted. While others cannot be fully articulated, for example skills and competencies (tacit knowledge) can only be fragmented through interaction with people and the environment. Knowledge resides in the mind of the possessor or knower, and when it is transmitted it becomes information.

Knowledge is a fluid mix of framed experience, values, contextual information, and expert knowledge that provides a framework for evaluating and incorporating new experiences and information. It originates and is applied in the mind of the knower. In organizations, it is often embedded not only in documents or repositories, but also in organizational routines, processes, practices, and norms. (Davenport and Prusak, 1998: 5)

Knowledge as the fifth factor of production is increasingly recognized as the engine of productivity and economic growth. And it has certain unique characteristics that distinguish it from physical labor. These are:

• Knowledge can be expanded and self-generated: As an engineer or physician gains more experience, their knowledge base will grow and
• Knowledge is transportable and shareable: this means that it can be easily moved and shared. This transfer, however, does not prevent its use by the original owner.

It has been emphasized that knowledge resides in people’s minds, it was expected that the rewards for knowledge are wages or salaries.

Knowledge, entrepreneurship, labor, capital, and land have been described as necessary factors of production in any economic system to function effectively. The rewards for these factors were highlighted.