In producing goods or providing services, businesses need resources. We also call it input. Economists call them factors of production. They consist of four components:
- Land
- Labor
- Capital
- Entrepreneurship
Land
Businesses can use the land to produce various agricultural commodities such as soybeans and corn. They can also use it as a location for factories, shops, or office buildings.
However, land does not only refer to land for business locations. It also includes various natural resources and everything on earth, such as:
- Crude oil
- Natural gas
- Coal
- Copper
- Iron ore
- Bauxite
- Water
- Wood
In classification, they usually fall into renewable natural resources such as soil and non-renewable natural resources such as metallic minerals.
Land provides raw materials for the various goods we produce, such as components, machinery, clothing, furniture, food, and beverages. For example, manufacturers need aluminum and iron to make cars, which are produced by processing bauxite. And miners extract bauxite from nature.
Likewise, businesses obtain wood from the forest to be used as input to make furniture. Then, tire manufacturers buy rubber latex from rubber plantations to produce their products.
Labor
Labor refers to the physical and mental effort of those who work in the company. It involves not only physical activity during the production process but also their skills and knowledge. Sometimes we call it human resources or human capital.
Workers may operate machinery and equipment in a factory. Others may be involved in administrative activities in the office or in retail outlets selling products. Others may be driving vehicles to deliver products to a warehouse.
Businesses can increase output by hiring more workers and by improving the existing workers’ quality. For the latter, it involves education, training, and development. Experience also contributes to quality.
Investing in the workforce is vital to business. Improved quality makes workers more productive. They produce more output for a fixed input. It leads to higher business profits as it bears a fixed salary/wages but can generate more output.
Such investments are increasingly important in the service business. The staff is directly involved in delivering the service. Thus, their quality determines the quality of service delivered.
Capital
From an economist’s perspective, capital refers to physical capital such as machinery, equipment, buildings, and vehicles. It is a man-made tool to help businesses to process inputs into outputs.
Capital goods examples are:
- Production machine
- Hand tools
- Wind turbine
- Conveyor belt
- Forklift
- Computer
- Logistics truck
They can vary greatly between businesses. For example, for a content writer business, computers, tables, chairs, and other office equipment are capital goods.
Then, economists exclude financial capital because it does not contribute directly to production. Instead, we use them indirectly, namely to buy capital goods.
But, for businesses, financial capital is as important as capital goods. They need it to finance operations and grow the business. In general, financial capital is divided into two categories:
- Equity capital represents the ownership interest in the company. It can be from the initial investment by the founder and from selling the company’s shares to the public on the stock exchange. Compensation for them is dividends and capital gains (for public companies).
- Debt capital represents liabilities, where the company has to pay interest and pay off debt as it matures. Examples are bank loans or bond issuance. Interest is compensation for creditors.
Entrepreneurship
Entrepreneurship is the activity and willingness of individuals to manage the other three resources to produce goods and services. We name these individuals as entrepreneurs willing to take risks, make decisions, and manage resources to run the business. Entrepreneurship is an input because, without it, there is no business and production.
Entrepreneurs realize their commercial ideas by setting up businesses. Then, they map out what raw materials and labor they need to produce the goods and services they plan. Finally, to put it all together, they need capital, which can come from personal pockets or external parties such as bank loans.
Furthermore, entrepreneurs also have to organize the business. They determine what business structure is appropriate, whether a sole proprietorship, partnership, or limited company. Another task is to structure and divide the activities required to operate into various business functions.
- Introduction to Business and Management: Roles and Functions of Business
- Business Process: Definition, Importance, and Management
- How Does a Business Work?
- The Role of Business in Society and the Economy
- Business: Definition, How it Works, Compete
