What is factor cost in economic theory?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Factor costs in economics are simply the costs of the things that go into making a given good or service.

Economists say that there are three (or sometimes four) main “factors of production.”  The first factor of production is “land.”  This is anything that is used to make a good or service that is not made by human beings.  For example, when a business builds a factory, the land that the factory is on is “land.”  When they are used to make goods, trees and water are also “land” because they are not made by human beings.  The second factor of production is “labor.”  This is simply the work that goes into making a good or service.  The work done by a worker in a factor is labor and so is the work done by a teacher in a classroom.  The third factor of production is “capital.”  This refers to anything that is man-made and used in the making of goods and services.  When a barber gives a haircut, he or she is using clippers and scissors and a chair.  All of these are capital because they are made by people and used to provide a service (the haircut).  Finally, some economists see entrepreneurship as a fourth factor of production.  This is the process of taking risks in order to create new kinds of economic activity. 

All of these factors of production have costs.  Their costs are the factor costs of any given product.

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