Factors of Production
What the Factors of Production Are
Factors of production: the resources used to make goods and provide services. Economists group them into four: land, labour, capital and enterprise.
Every business uses all four, but in a different mix: a farm needs a lot of land, a software firm hardly any. All four are scarce (unit 1.1.1), so each one has a price the business must pay to use it.
Enterprise
Enterprise: the willingness and ability to organise the other factors of production and to take the risk of running a business.
Enterprise is the factor that sets the others to work. The entrepreneur (unit 1.2.1) decides what to produce and how to combine land, labour and capital, and puts money at risk. The reward is profit, which, unlike the other rewards, is not agreed in advance and may be nothing at all.
Capital, Land and Labour in a Business
Land: natural resources used in production, such as water, crops, timber and oil. For a business, land also includes its premises.
Labour: the physical and mental effort people put into production.
Capital: man-made resources used in production, such as machinery, tools and vehicles.
The spec lists five things a business uses. The table places each one against its factor, using a high-street café as the example.
| Factor | What the business uses | In a café | Reward |
|---|---|---|---|
| Land | Its premises and raw materials | The shop itself; coffee beans, milk, water | Rent |
| Labour | Managers and employees | The manager, baristas and kitchen staff | Wages and salaries |
| Capital | Equipment | Coffee machine, ovens, fridges, tills | Interest |
| Enterprise | The owners or founders, who set up the business and take the risk | The person who opened the café | Profit |
Premises, the shop, office or factory a business works from, count as land. So do raw materials, because they start as natural resources: the coffee beans a café buys began as a crop.
The quality of a factor matters as well as the amount. Staff who are trained and experienced produce more per hour, and newer equipment breaks down less often. Spending on training and up-to-date machinery is how a business gets more output from the same number of workers.
Owners are enterprise; managers and workers are labour. The owners or founders set up the business and risk their own money, so their reward is profit. Managers and workers are paid a wage or salary whether the business does well or badly.
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