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Production is the process (or processes) a firm uses to transform inputs (e.g., labor, capital, raw materials) into

outputs, i.e. the goods or services the firm wishes to sell. Consider pizza making. The pizzaiolo (pizza maker)

takes flour, water, and yeast to make dough. Similarly, the pizzaiolo may take tomatoes, spices, and water to

make pizza sauce. The cook rolls out the dough, brushes on the pizza sauce, and adds cheese and other

toppings. The pizzaiolo uses a peel—the shovel-like wooden tool—to put the pizza into the oven to cook. Once

baked, the pizza goes into a box (if it’s for takeout) and the customer pays for the good. What are the inputs (or

factors of production) in the production process for this pizza?

Economists divide factors of production into several categories:
162 7 • Production, Costs, and Industry Structure

• Natural Resources (Land and Raw Materials) - The ingredients for the pizza are raw materials. These
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