The Factors & Their Rewards (Cambridge (CIE) O Level Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
The Factors of Production
Factors of production are the resources used to produce goods and services
Land, labour, capital and enterprise
The production of any good/service requires the use of a combination of all four factors of production
Goods are physical objects that can be touched (tangible) e.g. mobile phone
Services are actions or activities that one person performs for another (intangible) e.g. manicure, car wash
The Four Factors of Production
Land | Labour | Capital | Enterprise |
|---|---|---|---|
|
|
|
|
Some of the Factors of Production Required To Produce a Motor Car
Land | Labour | Capital | Enterprise |
|---|---|---|---|
iron ore | car designer | robotic arms | CEO |
Rewards for the Factors of Production
In a market economic system, the factors of production are privately owned by households or firms (The terms 'market' and 'free market' are used interchangeably)
They 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
Examiner Tips and Tricks
In Paper 1, MCQ frequently require you to apply your understanding of the factors of production by presenting you with a short scenario - and then asking you to identify which factors of production are mentioned in the scenario. Be careful that you do not identify man-made products as non man-made products, e,g. fertiliser is a capital good (man-made) even though it is an ingredient in the production of many agricultural products.
There will often be questions in which you are asked to identify the incorrect combination of factors and their rewards.
The terms 'market' and 'free market' are used interchangeably. Both mean that there is no government intervention. There is no economy in the world that is a completely (free) market economy. Some are more free than others.
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