Factors of production
Key definition: Factors of production are the resources used to produce goods and services.
The four factors and their rewards
| Factor | Meaning | Examples | Reward |
|---|---|---|---|
| Land | All natural resources used in production. | Farmland, forests, oil, minerals and water | Rent |
| Labour | Human physical and mental effort used in production. | Builders, teachers, doctors and engineers | Wages |
| Capital | Man-made goods used to produce other goods and services. | Machinery, tools, factories and delivery vehicles | Interest |
| Enterprise | The ability and willingness to organise production, make decisions and take risks. | An entrepreneur starting and managing a business | Profit |
Understanding each factor
- Land includes resources found in nature. The overall quantity of land is limited, although its use and productivity can change.
- Labour includes both physical and mental work. The value of labour depends partly on workers' education, skills, health and experience.
- Capital means capital goods, not money. Money is finance that can be used to purchase capital such as machines or buildings.
- Enterprise is provided by entrepreneurs. They combine the other factors, decide what and how to produce, and accept the risk of making a loss. Profit is their reward if the business succeeds.
Quantity and quality of factors of production
- Quantity - how much of a factor of production is available.
- Quality - how productive, skilled or useful that factor is.
Production can increase because an economy has more resources, because its existing resources become better, or because both occur. Greater quality usually allows more or better output to be produced from the same quantity of resources.
| Factor | Changes in quantity | Changes in quality |
|---|---|---|
| Land | Discovery or depletion of natural resources; land reclamation; loss of usable land through erosion or development. | Irrigation, fertilisers and conservation may improve it; pollution, deforestation and soil erosion may reduce it. |
| Labour | Population change, migration, retirement and school-leaving ages, and changes in the number of people choosing to enter paid work. | Education, training, healthcare, experience and improved working conditions. |
| Capital | Firms buying machinery and buildings increases capital; wear, damage and the scrapping of old equipment reduce it. | Better production methods, improved design and regular maintenance. |
| Enterprise | More people may start firms when finance is available and the expected reward is high. | Education, training, experience and access to reliable market information. |
Cause-and-effect examples
More education and training -> workers become more skilled -> labour quality rises -> output per worker can increase.
Firms expect higher future sales -> they buy more machinery -> the quantity of capital rises -> the maximum output firms can produce may increase.
Soil erosion -> land becomes less productive -> land quality falls -> agricultural output may decrease.