5.3.1 - Factors of production and intensity

Four factors of production

The factors of production are the resources used to produce goods and services. The four categories are land, labour, capital and enterprise; each contributes something different.

Land includes a site, water, minerals and agricultural soil. Labour includes the work of a farm worker, software developer or manager. Capital includes machines, tools, factory buildings and computers. Money finances the purchase of capital, but money itself is not the productive equipment meant by capital in this classification. A factory's building is capital; the land beneath it is land.

Enterprise identifies opportunities and decides what to produce and how to combine resources. An entrepreneur who opens a café might choose the site, recruit staff and buy ovens while risking savings if demand disappoints. Enterprise is not simply another name for every employee: it is the organising and risk-taking role.

In an illustrative small Kenyan bakery, water and the site are land; bakers' effort is labour; ovens and mixers are capital; and the owner's decision to combine those resources and bear the business risk is enterprise. Resources often complement one another: an oven without electricity, ingredients or someone able to operate it may produce nothing.

Labour and capital intensity

Production intensity describes the relative importance of labour and capital in an activity. It is a comparison of the resource mix, rather than a claim that a business uses only one resource.

A handmade jewellery workshop may depend on craftspeople shaping and setting each piece, using relatively simple tools. Its production is labour-intensive. An automated bottling plant may use conveyors, filling machines and robotic packers, with employees supervising and maintaining them. Its bottling activity is capital-intensive. These examples are illustrative: classify the actual process, rather than assume that all businesses in an industry are alike.

Both activities still use all four factors. A labour-intensive workshop uses tools and premises; a capital-intensive plant still needs skilled people, a site and enterprise. A large workforce does not automatically mean labour-intensive production: a huge automated manufacturer may employ many people yet use very substantial capital relative to its output and labour. Equally, one expensive computer does not automatically make an entire service capital-intensive.

Different activities within the same business can differ. An illustrative international hotel group may use automated equipment for laundry while guest assistance depends heavily on employees' communication and judgement. Intensity should be linked to the activity being examined. No universal number of employees or money threshold defines the distinction.

Changing resource relationships

A business can change the way its factors work together when technology, resource costs or demand change. Replacing repeated manual tasks with machinery substitutes capital for some labour, making that activity more capital-intensive. It does not remove every need for labour.