Factors of Production

Overview

Factors of production are the resources used to produce goods and services. Economists usually group them into four types: land, labour, capital and entrepreneurship. Together they make all economic activity possible.

Key points

• Land includes all natural resources such as soil, water, minerals and forests; its reward is rent.
• Labour is the human physical and mental effort used in production; its reward is wages.
• Capital means man-made goods like tools, machines and buildings used to produce more goods; its reward is interest.
• Entrepreneurship is the ability to organise the other factors and take risks; its reward is profit.
• All four factors must work together to produce goods and services efficiently.
• Better skills, technology and capital can increase productivity.

Important terms / dates

• Land: natural resources used in production; reward is rent.
• Labour: human effort; reward is wages.
• Capital: man-made aids to production; reward is interest.
• Entrepreneur: one who organises factors and bears risk; reward is profit.

Important questions

1. Name the four factors of production and their rewards.
2. How is capital different from land?
3. What is the role of an entrepreneur in production?
4. Why must all factors of production work together?

Quick revision

The four factors of production are land (rent), labour (wages), capital (interest) and entrepreneurship (profit). All four combine to create goods and services in an economy.