Economics · Ch 2 — Fundamental Concepts and Terminologies
Factors of Production
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Factors of Production
Production requires combining human and non-human resources, traditionally grouped into four factors of production, each earning its own characteristic reward:
| Factor | Meaning | Key characteristics | Reward |
|---|---|---|---|
| Land | All free gifts of nature used in production — soil, water, minerals, forests, climate and location, not just farmland | Fixed in aggregate supply; geographically immobile (though usable for different purposes at the same site); indestructible in the aggregate; a passive factor that cannot produce alone | Rent |
| Labour | Physical or mental human effort exerted for a reward, not for the direct satisfaction it gives | Labour and the labourer are inseparable; labour is perishable (a day's unused labour cannot be stored); labour usually has weaker bargaining power than capital; labour supply is influenced by non-economic factors (education, health, custom) | Wages |
| Capital | Wealth used to produce further wealth — the "produced means of production" (machinery, tools, factory buildings, stock of raw material) | Man-made (unlike land); depreciates with use and must be replaced; classified as fixed capital (machinery, buildings — used repeatedly) or working capital (raw materials, cash — used up in one cycle) | Interest |
| Entrepreneur / Organisation | The person or body that combines land, labour and capital, bears the risk of the business, and takes the key production decisions | Bears uninsurable business risk; performs the function of innovation and decision-making; is the residual claimant, receiving what is left after the other three factors are paid their contractual rewards | Profit |
Definition 1Rent
The reward paid to land for its productive s …
Definition 2Wages
The reward paid to labour for its productive …
Definition 3Interest
The reward paid to capital for its productive …
Definition 4Profit
The residual, uncertain reward earned by the entrepreneur after rent, wages and interest …