The Factors of Production

As we learned in Chapter 2, economists divide factors of production into four principal classes: land, labor, physical capital, and human capital. Land is a resource provided by nature; labor is the work done by human beings.

Physical capital—often referred to simply as “capital”—consists of manufactured productive resources such as equipment, buildings, tools, and machines.

In Chapter 9 we defined capital: it is the value of the assets that are used by a firm in producing its output. There are two broad types of capital. Physical capital—often referred to simply as “capital”—consists of manufactured resources such as equipment, buildings, tools, and machines.

Human capital is the improvement in labor created by education and knowledge that is embodied in the workforce.

In the modern economy, human capital, the improvement in labor created by education and knowledge, and embodied in the workforce, is at least equally significant. The importance of human capital has been greatly increased by the progress of technology, which has made a high level of technical sophistication essential to many jobs—one cause of the increased premium paid for workers with advanced degrees.