The four factors of production and their rewards

G3 Economics - syllabus K343, 2027

What this lesson teaches

  • I can name the four factors of production and the reward each one earns.

    Syllabus K343, 1.2.1. Factors of production and their rewards: definitions of factors of production: land, labour, capital and enterprise; rewards to factors of production: rent, wages, interest and profit

Make a guess

A hawker borrows $20,000 from a bank to start her stall. In economics, is that $20,000 the stall's capital?

  1. No. Capital is the stoves and fridges the money buys.
  2. Yes. Capital means the money a business starts with.
  3. Yes, because money earns interest like capital does.
Show the answer

No. Capital is the stoves and fridges the money buys.

Capital means human-made goods used in production. Money pays for capital, but money itself makes nothing.

Land, labour, capital and enterprise produce goods and services, earning rent, wages, interest and profit.

Factors of production are the resources used to produce goods and services. There are four. Land is natural resources: the ground itself, plus minerals, fish, forests and water. Labour is human effort, physical and mental, used in production.

Capital is human-made goods used to produce other goods, such as machines, tools, factories, computers and delivery vans. Capital is not money. Money buys capital, but the machine is the factor of production.

Enterprise is the willingness to organise the other three factors and take the risk of starting or running a business. The person who does this is an entrepreneur.

Each factor earns a reward. Land earns rent. Labour earns wages. Capital earns interest. Enterprise earns profit. Profit is the reward for taking risk, so it can be negative: a business can make a loss.

Sort these

A bakery makes bread every morning. Sort each item into the factor of production it belongs to.

Groups: Land, Labour, Capital, Enterprise.

  • The cashier who serves customers.
  • The delivery van that takes bread to cafes.
  • The plot of land the bakery is built on.
  • The baker who shapes the loaves at 4am.
  • The ovens and mixing machines.
  • The owner who risked her savings to open the bakery.
  • The water used to make the dough.
  • The owner's decision to open a second branch.
Show the answer

Land

  • The plot of land the bakery is built on. Land as a factor of production includes the ground itself, and its reward is rent.
  • The water used to make the dough. Water is a natural resource, which economists group under land.

Labour

  • The cashier who serves customers. Serving is human work, so the cashier supplies labour.
  • The baker who shapes the loaves at 4am. Human effort used in production is labour, and it earns wages.

Capital

  • The delivery van that takes bread to cafes. A van is a man-made tool of production, so it is capital.
  • The ovens and mixing machines. These are human-made goods used to make other goods, which is capital.

Enterprise

  • The owner who risked her savings to open the bakery. Taking the risk and organising the other factors is enterprise, rewarded by profit.
  • The owner's decision to open a second branch. Deciding how to use the business and bearing the risk is the job of the entrepreneur.
Land
Natural resources; reward is rent.
Labour
Human effort; reward is wages.
Capital
Human-made goods used in production; reward is interest.
Enterprise
Organising production and taking risk; reward is profit.

Worked example: The factors behind a hawker stall

Picture one stall selling chicken rice. Each factor of production is easy to spot.

  1. Land: the stall space and the rice, chicken and water used.
  2. Labour: the cook and the assistant who serves customers.
  3. Capital: the stoves, chopping boards, rice cooker and fridge.
  4. Enterprise: the owner who decided to open the stall, pays the rent and keeps any profit or bears any loss.

Watch out for this

Capital means the money a business has in the bank.

In economics, capital is human-made goods used in production, such as machines. Money is used to buy capital, but money itself does not produce anything.

Check your understanding

Which factor of production earns interest as its reward?

  1. Capital
  2. Enterprise
  3. Land
Show the answer

Capital

Right. Capital earns interest; land earns rent, labour wages and enterprise profit.

Check your understanding

A delivery company buys ten new electric vans. Which factor of production has increased?

  1. Land
  2. Enterprise
  3. Capital
Show the answer

Capital

Yes. Vans are human-made goods used to provide a service.

The Wise Otter

Getting your study space ready