As the economy picks and we stagger out of recession it seems more and more people are deciding to risk their own business ventures. Below is a quick guide to the very basic economics of a business, the four factor of production.
Factors of production are generally considered to be anything that contributes towards output, however this can be broken down to land, labour capital and enterprise.
All are essential for the fluid functioning of a business and no business in world could work without any one.
Land is a natural factor of production, with its value determined by site and location. If your business is located in a well off area you will typically pay a higher level of rent.
Land may be the office used for workers or 100 acres of barley fields used by a farmer. However land is described as a passive factor as it is incapable of working on its own initiative or producing anything by itself, meaning it requires support from labour, capital and enterprise.
Labour is essentially an ability to work. This includes both physical and mental labour. A labourer is a worker. Therefore yourself and your employees are all labourers.
Capital can be broken down into wealth, money and income. Capital is any wealth that is used to further production. For example, owning a luxury car would be described as wealth, whereas owning a luxury car and using it as a taxi would be described as capital. Essentially, all capital is wealth, but not all wealth is capital.
With regards to money, money becomes capital when it is invested in capital goods that will go to further production, such as machinery, equipment, tools etc. The investment of money can come from many places such as bank loans or venture capitalists or places like BusinessLoansDirect.com. An increasingly popular method of securing a business loan comes from reputable online loan companies.
With regards to income, this is generated by capital. For example the owner of a taxi will gain income from the use of his taxi.
This is the factor of production that is hardest to measure. An entrepreneur will organize the other factors of production and ensure they work harmoniously. A good entrepreneur will be well organized, have a good business mind, be innovative and take risks. These characteristics make up an entrepreneurial spirit often needed for success within business.
The four factors of production are the skeletal of any business. Without a clear understanding of where your four factors lie it can be difficult, nigh on impossible to run a successful business.