Factors of Production and Their Rewards (Cambridge (CIE) IGCSE Economics): Revision Note

The factors of production

• Factors of production are the resources used to produce goods and services

  • Land, labour, capital and enterprise

• The production of any good or service requires the use of a combination of all four factors of production

  • Goods are physical objects that can be touched (tangible) e.g. mobile phone

  • Services are actions or activities that one person performs for another (intangible) e.g. manicure, car wash

The four factors of production

1. Land

• Non man-made natural resources available for production

• Some countries have a vast amount of a particular natural resource and so are able to specialise in its production

  • E.g., oil, wood, fish, corn, iron ore

2. Labour

• The human input into the production process

• Labour involves mental or physical effort

• Not all labour is of the same quality

  • It can be skilled or unskilled

  • Some workers are more productive than others because of their education, training and experience

3. Capital

• Capital is any man-made resource that is used to produce goods and services

• E.g., tools, buildings, machines and computers

4. Enterprise

• Enterprise involves taking risks in setting up or running a firm

• An entrepreneur decides on the combination of the factors of production necessary to produce good and services with the aim of generating profit

Some of the factors of production required to produce a motor car

Rewards for the factors of production

• In a market economic system, the factors of production are privately owned by households or firms (the terms 'market' and 'free market' are used interchangeably)

  • They make these resources available to firms that use them to produce goods and services

  •  Firms purchase land, labour and capital from households in factor markets 

• Households receive the following financial rewards for selling their factors of production. This reward is called factor income

  • The factor income for land → rent

  • The factor income for labour → wages

  • The factor income for capital → interest

  • The factor income for entrepreneurship → profit

Causes of changes in the quantity and quality of factors of production

• If the quantity or quality of a country's factors of production change, then the productive potential of the country also changes 

  • If the quantity or quality increases, this corresponds to an outward shift of the potential output of an economy, as shown on a production possibilities curve model (see Subtopic 1.4.1). The country is able to produce more

  • If the quantity or quality decreases, this corresponds to an inward shift of the potential output of an economy, as shown on a production possibilities curve model. The country now cannot produce as much as it used to

What changes the quantity and quality?