Factors of Production - resources used in the production of good and services - labor, capital, entrepreneurs, physical resources, and information resources.
Labor (or Human Resources) - the physical and mental capabilities of people as they contribute to economic production
Capital - the funds needed to create and operate a business enterprise
Entrepreneur - an individual who accepts the risks and opportunities involved in creating and operating a new business venture
Physical Resources - tangible things organizations use in the conduct of their business
Information Resources - data and other information used by business
Factors of Production
A basic difference among economic systems is the way in which they manage their factors of production - the resources that a country’s businesses use to produce goods and services. Economists have long focused on four factors of production: labor, capital, entrepreneurs, and physical resources. Newer perspectives, however, broaden the idea of natural resources to include all physical resources. In addition to the classic four, information resources are now considered as well. (The concept of factors of production can also be applied to the resources that an organization manages in order to produce good and services.)
Labor - People who work for businesses provide labor. Sometimes called human resources, labor includes the physical and intellectual contributions people make while engaged in economic production. AOL Time Warner, for example, employs 88,000 people. Such large operations require widely skilled work-forces, ranging from software engineers and media experts to financial analysts.
Capital - Obtaining and using labor and other resources requires capital - the financial resources needed to operate an enterprise. You need capital to start a new business and then to keep it running and growing. AOL Time Warner needs millions of dollars in cash (and millions more in equipment and other assets) to run its operations. A major source of capital for small businesses is personal investment by owners. Investments can come from individual entrepreneurs, from partners who start businesses together, and from investors who buy stock. Revenue from the sale of products is a key and ongoing source of capital once a business has opened its doors.
Capital can also include the market value of corporate stock. When America Online acquired Time Warner for $106 billion in 2001, the deal involved very little actual cash. Most of it was handled through transfers of stock. Bank lines of credit and the market value of liquid assets (those that can be quickly and easily sold for cash) are also form of capital.
Entrepreneurs - An entrepreneur is an individual who accepts the risks and opportunities entailed by creating and operating a new business. AOL was started by James Kimsey, who had the technical skills to understand how the internet works, the conceptual skills to see its huge future potential, and the risk-taking acumen to bet his own career and capital on the idea of AOL. Both Time Inc. And Warner Brothers Studios, two established companies that later merged into Time Warner, were also started (both in 1922) by entrepreneurs who risked personal fortunes on the success of their new ventures.
In 2001, the entrepreneurial vision of leaders that both AOL and Time Warner saw the potential benefits of merging the two firms. Most economic systems encourage entrepreneurs both to start new businesses and to make the decisions that turn small businesses into larger ones big enough to move into new markets.
Physical Resources - Physical resources are the tangible things that organizations use to conduct their business. They include natural resources and raw materials, offices, storage, production facilities, parts and supplies, computers and peripherals, and a variety of other equipment. AOL Time Warner, for example, needs land, buildings, and computers.
Information Resources - The production of tangible goods once dominated most economic systems, but today information resources play a major role. Businesses rely on market forecasts, on the specialized knowledge of people, and on economic data for much of their work. In turn, much of what they do results either in the creation of new information or the repackaging of existing information for new users.
AOL Time Warner produces few tangible products. Instead, America Online provides online services for millions of subscribers who pay monthly access fees. Time Warner Entertainment produces movies and televion programming. A subsidiary, Turner Broadcasting Systems, gathers information about world events and then transmits it to consumers over its Cable News Network (CNN). Essentially, then, AOL Time Warner is in the information business.
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