Factors of production

Economics · The basic economic problem. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Factors of production are the resources used to make goods and services. There are four. Land is every natural resource, such as soil, minerals, forests, rivers and fish in the sea. Labour is the physical and mental effort of people. Capital is any man-made good used to produce other goods, such as machines, factories and delivery vans. Enterprise is the person who organises the other three factors and takes the risk of the business.

Each factor earns a reward: rent, wages, interest and profit. The quantity of a factor is how much of it there is. The quality of a factor is how productive it is. Both can change over time.

Rules to remember

Land (natural resources) earns rent
Labour (human effort, physical and mental) earns wages
Capital (man-made goods used in production) earns interest
Enterprise (organising the other factors and taking risks) earns profit
Quantity of labour rises with population growth, immigration, a higher retirement age or more people willing to work
Quality of labour rises with education, training and better health care
Capital grows through investment and falls when worn-out machines are not replaced; land grows when new resources are found or land is reclaimed

Common mistake

In economics, capital does not mean money. Money in a bank is not a factor of production; capital is the machinery, buildings and equipment used to produce goods.

Worked example

A cotton farm uses river water, a tractor and hired pickers. The owner borrowed money to start the farm and could lose it all. Name the factor of production in each case.

River water is a gift of nature, so it is land.
The tractor is man-made and helps to produce another good, so it is capital.
The pickers supply human effort, so they are labour.
The owner organises the farm and bears the risk, so the owner is enterprise.

Answer: Water: land. Tractor: capital. Pickers: labour. Owner: enterprise, rewarded with profit.

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