3
Factors of Production
1.3
1.3.1 nature and definition of
factors of production: land,
labour, capital and enterprise
The 4 Factors of Production
We usually distinguish 4 groups of resources that we call the Factors of
Production (FoP).
CAPITAL
ENTERPRISE
LAND
LABOUR
The Factors of Production
LAND includes all natural resources.
LABOUR includes all « human » resources.
Examples: doctors, teachers, electricians, construction workers, waiters, etc.
CAPITAL includes all man-made resources.
Examples: animals, plants, water, sunlight, wind, oil, copper, etc.
Examples: factories, machinery, tools, intermediate goods, etc.
ENTERPRISE (or ENTREPRENEURSHIP) includes all entrepreneurs.
An entrepreneur is someone who take initiative and risk to combine and organise
resources in order to produce goods and services.
1.3.2 difference between
human capital and physical
capital
Human Capital (Labour)
refers to the human resources required in the production process. This
includes physical human effort and intellectual input from the workforce.
Examples include the services of an accountant, barista, chef, doctor or
estate agent.
Physical Capital (Capital)
refers to non-natural (manufactured) products used in the production process,
such as machinery, tools, equipment and vehicles. Capital is used to facilitate
production. For instance, infrastructure such as transportation and
communications networks are vital for the growth and development of
society.
1.3.3 rewards to the factors of
production
The Factors of Production
Resource owners receive an income in exchange for selling or renting
them to firms.
The income received by LAND owners is known as RENT.
The income received by LABOUR owners is known as WAGE (unskilled)
and INCOME (skilled).
The income received by CAPITAL owners is known as INTEREST.
The income received by ENTERPRISE owners is known as PROFIT.
Nb: These are merely names given by economists, there’s no clear logic
behind it so just remember them.
1.3.4 division of labour and
specialisation
Specialisation & the Division of Labour
Specialisation refers to a situation in which individuals, firms or countries
focus on the production of a narrow range of goods and services.
The Division of Labour (DoL) is the process of breaking up a task into
smaller, interconnected sub-tasks.
The DoL allows workers to specialise (i.e. each of them can focus on a
specific part of the production process).
1.3.5 role of the entrepreneur
in contemporary economies:
risk and organisation of the
other factors of production
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