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.
- 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.
- Land: the stall space and the rice, chicken and water used.
- Labour: the cook and the assistant who serves customers.
- Capital: the stoves, chopping boards, rice cooker and fridge.
- 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?
- Capital
- Enterprise
- Land