The Factors of Production (Edexcel IGCSE Economics)

Capital, Labour, Land & Enterprise

• The factors of production are the resources used by businesses to produce goods and services

The Four Factors of Production

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

Diagram: Factors of Production in Vehicle Production

• In order to produce a vehicle, a business requires

  • Capital, including a CAD/CAM system as well as a production line that may use robots

  • Enterprise, including the sourcing of finances by the entrepreneur and the ability to manage all of the required factors of production

  • Land, including factory premises and storage facilities, as well as a test track to check vehicles meet quality standards

  • Labour, including design and production workers, as well as quality testers

The Rewards for the Factors of Production

• In a free market economic system, the factors of production are privately owned by households or firms

  • Households 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