Factors of Production

Land

Land covers all natural resources (the "gifts of nature") that are used in production. This includes the physical ground itself, plus everything in or on it: minerals, forests, rivers, oil, fish stocks, fertile soil, sunlight for crops.

Key features:

• Land is non-man-made. It exists without human intervention.
• A country's natural endowment of land determines what it can specialise in. Saudi Arabia has oil, Iceland has geothermal energy, New Zealand has grazing land for sheep, the Democratic Republic of the Congo has cobalt.
• Some types of land are renewable (forests, fish, sunlight) and some are non-renewable (oil, coal, metal ores). Non-renewable land becomes scarcer over time as it is used up.

Reward for the owner of land: rent.

Labour

Labour is the human effort (physical and mental) supplied by people who work in the production process. This includes factory workers, designers, teachers, doctors, software engineers, farmers and every other paid role.

Key features:

• Labour can be skilled or unskilled. A surgeon and a supermarket cashier are both supplying labour, but the skill levels differ.
• The quality of labour can be raised by education and training. A worker with more training is usually more productive (produces more output per hour worked).
• Labour is the only factor that can refuse to work, demand better conditions, or join a union.

Reward for the supplier of labour: wages (or salary).

Capital

Capital is the man-made resources used to produce other goods and services. This includes machinery, tools, vehicles, factory buildings, computers, robotic arms, conveyor belts and shop fittings.

Two crucial points that examiners test repeatedly.

• Capital is physical, not financial. A factory machine is capital; a £100,000 bank loan is not. The loan is finance that may be used to buy capital, but the money itself is not a factor of production.
• Capital is anything man-made that is used in production. It splits into fixed capital, which is durable and lasts many production cycles (machinery, vehicles, factory buildings), and working capital, which is used up within a single cycle (rolled steel, components, fertiliser, packaging). The test that separates capital from land is man-made versus natural: iron ore, crude oil, sand and standing timber are land, but once people have processed or manufactured them they count as capital.

Reward for the owner of capital: interest.

Enterprise

Enterprise (or entrepreneurship) is the human factor that organises land, labour and capital into a business and bears the financial risk of the venture. The person who supplies enterprise is called an entrepreneur.

The entrepreneur makes two distinctive contributions:

• Organising. Deciding what to produce, how to produce it, where to locate, who to hire, and how to combine the other three factors.
• Bearing risk. Investing time and money up front, with no guarantee that customers will buy or that the business will survive.

Examples of enterprise: founding a tech start-up, opening a corner shop, setting up a freight company, starting a private clinic.

Reward for enterprise: profit (the residual left over after rent, wages and interest have been paid).