O LevelEconomicsCambridge (CIE)Revision Notes1. The Basic Economic Problem1.2 The Factors of ProductionThe Factors & Their Rewards

The Factors & Their Rewards (Cambridge (CIE) O Level Economics)

Revision Note

Steve Vorster

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

  • Non man-made natural resources available for production

  • Some countries have a vast amount of a particular natural resource and so are able to specialise in its production

  • E.g. Oil, wood, fish, corn, iron ore

  • The human input into the production process

  • Labour involves mental or physical effort

  • Not all labour is of the same quality. It can be skilled or unskilled. Some workers are more productive than others because of their education, training and experience

  • Capital is any man-made resource that is used to produce goods/ and services

  • E.g. Tools, buildings, machines and computers

  • Enterprise involves taking risks in setting up or running a firm

  • An entrepreneur decides on the combination of the factors of production necessary to produce good and services with the aim of generating profit


 Some of the Factors of Production Required To Produce a Motor Car

Land

Labour

Capital

Enterprise

iron ore
rubber
oil
sand
cows

car designer
production director
production line staff
supply chain staff

robotic arms
conveyor belt
rolled steel
computers
seats
dashboards
mirrors
leather

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 Tip

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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