4 Categories of Resources in Economics
When economists refer to resources, they are talking about resources that actually produce products or services. So, what are the types of resources in economics needed to produce something?
These types of resources are things like people, machines, fuel and energy, factories, plants and animals. Obviously, many things can go into the production of goods and services. Economists call these things “factors of production” and have separated them into four categories.
The four categories of economic resources are:
- Land
- Labor
- Capital
- Entrepreneurship
Consider what this classification of economic resources really means by taking the example of the Hasty Hare Corporation, a manufacturer of sneakers for rabbits.
Land is not just real estate. It is any natural resource found in nature that can be used to produce goods and services. The land category includes things like trees, plants, livestock, wind, sun, water and minerals.
Natural resources are limited. People can't make them, but they can find new ways of recovering them, such as fracking for natural gas. While some natural resources are limited, others are renewable, such as wind, sun and trees.
For Hasty Hare, the natural resources are the land where the factory is located, the electricity used to run the machines in the factory and the raw cotton used to make the shoelaces.
Labor refers to any human contribution, either physical or intellectual. Labor takes a natural resource from its original condition and transforms it into a capital good.
Usually, when you think of labor, you think of physical labor like working in a factory, driving a truck to make deliveries, constructing a building or stacking goods in a warehouse. These are all activities that contribute to the production of goods or services. However, labor has come to rely more on the intellectual contributions rather than physical labor.
Hasty Hare uses its labor to operate the machines on the production lines, drive the forklifts in the warehouse and deliver the finished products to the stores. Labor is also needed to write the programs for the computers that control the activities of the robots working on the production lines.
The first thing to understand about capital is that it is not money. Money is not a resource. By economic definition, resources must be productive, and money does not do that. Money is a means to move the economy, but by itself, it doesn't produce anything.
Money is used to acquire the productive resources that are used to produce goods and services. As an example, refineries purchase oil, a natural resource, to make gasoline, a capital good. Developers use funds to acquire property, a natural resource, to construct an office building, a capital good.
However, in terms of factors of production, personal and private capital are different. An automobile that transports family members is not considered a capital good by economists, but a truck that carries merchandise to stores is a capital good. Hasty Hare has capital goods in the form of machinery, plants, buildings, office equipment, computers and delivery vans.
Entrepreneurship is the creativity required to bring all of a company’s resources together to produce a good or service that is sold in the marketplace. In a sense, entrepreneurship is a special form of labor.
Entrepreneurs are willing to risk time and money to start a business with the intention of earning a profit. They organize the other factors of production to create a business. These businesses produce the goods and services that consumers want to buy.
The management of Hasty Hare studies the types of sneakers that its customers want to buy, and its designers create the colors and models that will sell in the marketplace.