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    Entrepreneur as a Factor of Production: Meaning and Functions

    There are four main factors of production. Land, Labour and Capital are the main factors of production. The entrepreneur is the one that combines these factors in the correct proportion and mobilizes them. Let us learn more about entrepreneurs and their main functions.

    Theory Of Production And Cost

    Factors of Production – Entrepreneur

    There are four main factors of production. Land, Labour, and Capital are the main factors of production. The entrepreneur is the one that combines these factors in the correct proportion and mobilizes them. Let us learn more about entrepreneurs and their main functions.

    Factors of Production – Entrepreneurs

    The entrepreneur is the one that initiates the process of production by mobilizing the other factors of production. He organizes, manages and controls the affairs of the firm. He is the risk bearer and in consideration of this the profit maker as well. Simply put the entrepreneur is the owner of the business.

    However, these are the days of specialization. So we often see a separation between ownership and management. So we now have a different set of functions for the managers and the entrepreneurs.

    The managers take care of the routine day to day decisions. The entrepreneurs focus on the risk bearing and initiating production. Let us take a look at some functions of the entrepreneur.

    Browse more Topics under Theory Of Production And Cost

    Meaning of Production

    Factors of Production – Land

    Factors of Production – Labour

    Factors of Production – Capital

    Production Function

    The Law of Diminishing Returns

    Returns to Scale (Production Function)

    Production Optimisation

    Functions of an Entrepreneur

    1] Initiating the Business

    This is the first function of the entrepreneur, to actually start a business. Firstly the entrepreneur spots business opportunities in the economy he can exploit. Then he develops the project ideas and decides on the scale of the business. Finally, he must obtain the different factors of productions to get the ball rolling.

    The entrepreneur has to build up his business dynamically. He must coordinate the factors of production and utilize them in the right proportions. The aim is to generate higher productivity from these factors. So the entrepreneur must get the greatest yield for the lowest cost from these factors of production.

    2] Risk Bearing

    This is perhaps the most important function of entrepreneurs. The entrepreneurs bear the risks of failure in exchange for the profits of the company. So in dynamic economic model things can change very fast. So the business plans of the entrepreneur should be able to adapt to the changes.

    The consumer taste may change, there can be new entrants in the market, taxes may increase, etc. These will all affect the demand and supply of the product. And in turn, the entrepreneur may face some financial losses. Entrepreneurs have to bear these financial risks.

    Then there are technological risks as well. These days we make technological advancements every day. So there is a risk that the product may become obsolete. Or more innovative means of production may be developed. There are other risks such as theft, accidents, etc.

    In exchange for all these risks, the entrepreneurs enjoy the profits earned by the firm. Profit is their reward for bearing the risks. Unlike some of the other management functions, risk bearing cannot be delegated to the manager. The owner/entrepreneurs have to bear all the risk.

    3] Innovation

    One of the other important functions of entrepreneurs is to continuously innovate. This innovation can be in the field of new products, new production methods/technology, new business models, exciting and new promotion tactics, exploring new markets, etc. This will help entrepreneurs with the economic growth of the firm.

    However, any new innovation or technology comes with its own share of new risks as well. It will be the job of the entrepreneur to manage such risks in exchange for the scope for higher returns and higher profits. Ultimately this innovative spirit of the entrepreneur will lead to advancements in the firm and even the economy as a whole. The most successful entrepreneurs are all great innovators.

    Solved Question for You

    Q: ___________ is the factor of production that brings together all the other factors.LandLaborCapitalEntrepreneurAns: The correct answer is option D. An entrepreneur is a person who combines the other factors of production to run a business and earn a profit. He will also bear the risk of failure.

    Source : www.toppr.com

    What Are the Four Factors of Production?

    The factors of production impact the financial markets and investment outcomes.

    What Are the Four Factors of Production?

    The factors of production impact the financial markets and investment outcomes.

    By Coryanne Hicks Dec. 21, 2020

    Innovations in how the factors of production are used affects their yield through profits, labor productivity or income streams.(GETTY IMAGES)

    The factors of production are the inputs used to produce a good or service in order to produce income.

    Economists define four factors of production: land, labor, capital and entrepreneurship. These can be considered the building blocks of an economy. How these factors are combined determines the success or failure of the outcome.

    "The four factors of production are needed in an efficient market to provide goods and services at an affordable price at the right time, place and mix," says Bob Castaneda, program director for Walden University's Master of Science in Finance. "Missing the calibration of these factors can be disastrous for the supplier and consumer." The supplier may face higher costs of production, forcing them to charge a higher price to the consumer or risk going out of business.

    An example Castaneda uses to illustrate the importance of the four factors of production is when Ray Kroc bought McDonald's (ticker: MCD) and then found himself lacking capital, land and entrepreneurs to open new stores. To remedy this, Kroc created a franchise model that brought all three of these factors together.

    A key element of the factors of production is their scarcity. "The availability, quality and costs of these factors affect costs of production, R&D spending and market potential," says Usha Haley, director of the Center of International Business Advancement at Wichita State University's Barton School of Business. "They contribute to rents, wages, interest rates, and capacities for innovation and in that fashion are important for investors to understand."

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    Investors can gauge investment opportunities by where factors of production are improving and where they are disadvantaged. "For example, looking at the factors of production in the U.S. versus globally in the developing world can offer perspective on where investors can put their money to work for the highest returns," says Jack McIntyre, a portfolio manager at Brandywine Global.

    Here is a closer look at each of the four factors of production and how they come together to impact the financial markets:

    Land. Labor. Capital. Entrepreneurship.


    Land as a factor of production includes the natural resources used to create a good or service. These can be renewable resources like forests or nonrenewable resources like oil, gold or water, says Edward Petersmarck, executive director of practice development at M&O Marketing.

    The U.S. is advantaged in terms of land as a factor of production. The third-largest nation by geography, America is home to an abundance of natural resources, including more than 750 million acres of forest, nearly 2.3 billion acres of agricultural land and the largest supply of coal, natural gas and petroleum. Other nations may have similar land mass but are unable to access these resources as readily due to harsher climates.

    An interesting facet of land as a factor of production is how use is influenced by the capital markets. "Tax schemes can heavily influence the land component and where people do business," McIntyre says. "For example, Tesla moving out of California to Texas."

    Similarly, many companies and people have been moving out of urban areas due to the pandemic. "One of the key advantages of urban areas was the centralized transportation system," McIntyre says. "If you're working from home, that advantage is diminished."


    "When we think about the factors of production, the one we are most focused on is labor," says John Traynor, chief investment officer of People's United Advisors. Labor is the work done by the people in a workforce. Its value is dependent on the human capital, or the skills, knowledge, training and experience of these workers.

    "So many of the topics being debated today in the political and economic spheres revolve around human capital and finding ways to increase productivity for all workers," Traynor says. Increasing the factors of production used in creating a good can increase production, but it is the more efficient use of those factors "that leads to greater productivity and rising living standards," he adds.

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    Traynor gives the classic example of a team of men digging a trench with shovels. An entrepreneur can invest in a bulldozer to speed production, but if he doesn't teach the men how to use it, all he has is "men with shovels and a costly lawn ornament."

    Thanks to inventions like bulldozers, labor has been disadvantaged by increasing productivity, as fewer workers are required to create the same amount of output. Similarly, globalization has placed increasing pressure on domestic labor forces to compete with outsourcing opportunities.

    Labor is also a key consideration for many businesses as they need to operate sizable, and often educated or experienced, workforces, Castaneda says.

    Source : money.usnews.com

    Factors of Production Definition

    Factors of production are the inputs needed for the creation of a good or service, these include labor, entrepreneurship, and capital.


    Overview TERMS A-B Absorption Costing Amortization

    Average Collection Period

    Bill of Lading TERMS C Cash Book Cost of Debt Cost of Equity

    Cost-Volume-Profit (CVP) Analysis

    Current Account TERMS D-E

    Days Payable Outstanding


    Double Declining Balance Depreciation Method


    Economic Order Quantity


    Factors of Production

    Fiscal Year (FY) General Ledger Just in Time (JIT) TERMS N-O

    Net Operating Loss (NOL)

    Net Realizable Value (NRV)

    Noncurrent Assets Operating Cost Operating Profit TERMS P-S Production Costs Pro Forma Invoice Retained Earnings Revenue Recognition Sunk Cost TERMS T-Z

    Triple Bottom Line (TBL)

    Variable Cost

    Work-in-Progress (WIP)


    Year-Over-Year (YOY)

    Zero-Based Budgeting (ZBB)

    Factors of Production

    By JASON FERNANDO Updated November 05, 2021

    Reviewed by THOMAS BROCK

    Fact checked by YARILET PEREZ

    What Are Factors of Production?

    Factors of production are the inputs needed for creating a good or service, and the factors of production include land, labor, entrepreneurship, and capital.


    Factors of production is an economic term that describes the inputs used in the production of goods or services to make an economic profit.

    These include any resource needed for the creation of a good or service.

    The factors of production are land, labor, capital, and entrepreneurship.1

    The state of technological progress can influence the total factors of production and account for any efficiencies not related to the four typical factors.

    Land as a factor of production can mean agriculture and farming to the use of natural resources.

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    Factors Of Production

    How Factors of Production Work

    The modern definition of factors of production is primarily derived from a neoclassical view of economics. It amalgamates past approaches to economic theory, such as the concept of labor as a factor of production from socialism, into a single definition.

    Land, labor, and capital as factors of production were originally identified by early political economists such as Adam Smith, David Ricardo, and Karl Marx. Today, capital and labor remain the two primary inputs for processes and profits. Production, such as manufacturing, can be tracked by certain indexes, including the ISM manufacturing index.

    4 Factors of Production

    There are four factors of production—land, labor, capital, and entrepreneurship.

    Image by Sabrina Jiang © Investopedia 2020

    Land As a Factor

    Land has a broad definition as a factor of production and can take on various forms, from agricultural land to commercial real estate to the resources available from a particular piece of land. Natural resources, such as oil and gold, can be extracted and refined for human consumption from the land.

    Cultivation of crops on land by farmers increases its value and utility. For a group of early French economists called “the physiocrats,” who predated the classical political economists, land was responsible for generating economic value.

    While land is an essential component of most ventures, its importance can diminish or increase based on industry. For example, a technology company can easily begin operations with zero investment in land. On the other hand, land is the most significant investment for a real estate venture.

    Labor As a Factor

    Labor refers to the effort expended by an individual to bring a product or service to the market. Again, it can take on various forms. For example, the construction worker at a hotel site is part of labor, as is the waiter who serves guests or the receptionist who enrolls them into the hotel.

    Within the software industry, labor refers to the work done by project managers and developers in building the final product. Even an artist involved in making art, whether it is a painting or a symphony, is considered labor. For the early political economists, labor was the primary driver of economic value. Production workers are paid for their time and effort in wages that depend on their skill and training. Labor by an uneducated and untrained worker is typically paid at low prices. Skilled and trained workers are called “human capital” and are paid higher wages because they bring more than their physical capacity to the task.

    For example, an accountant’s job requires the analysis of financial data for a company. Countries that are rich in human capital experience increased productivity and efficiency. The difference in skill levels and terminology also helps companies and entrepreneurs create corresponding disparities in pay scales. This can result in a transformation of factors of production for entire industries. An example of this is the change in production processes in the information technology (IT) industry after jobs were outsourced to countries with lower salaries.

    Source : www.investopedia.com

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