1.2 The Factors of Production

Definitions of the four factors of production, their financial rewards, the concept of mobility, and influences on the quantity and quality of resources in an economy.

Factors of Production

The resources used to produce goods and services, categorized into land, labour, capital, and enterprise.

Land

Non man-made natural resources available for production, such as oil, wood, fish, corn, and iron ore.

Labour

The human input into the production process involving mental or physical effort.

Capital

Any man-made resource that is used to produce goods and services, such as tools, buildings, machines, and computers.

Enterprise

The factor of production involving taking risks in setting up or running a firm and deciding on the combination of the factors of production to generate profit.

Entrepreneur

An individual who decides on the combination of the factors of production necessary to produce goods and services with the aim of generating profit.

Goods

Physical objects that can be touched (tangible), such as a mobile phone.

Services

Actions or activities that one person performs for another (intangible), such as a manicure or a car wash.

Market Economic System

A system where the factors of production are privately owned by households or firms with no government intervention; also referred to as a 'free market'.

Factor Income

The financial reward received by households for selling their factors of production to firms.

Rent

The factor income or financial reward received for land.

Wages

The factor income or financial reward received for labour.

Interest

The factor income or financial reward received for capital.

Profit

The factor income or financial reward received for entrepreneurship.

Mobility of the Factors of Production

The ease with which firms can switch between different factors of production during the production process.

Geographical Immobility of Labour

A situation where workers find it difficult to move from one geographical area to another to secure employment due to barriers like family ties or housing costs.

Occupational Immobility of Labour

The inability of a worker to change occupations when they lose a job, which is a particular issue when an economy faces structural unemployment.

Process Innovation

A practice that often results in productivity improvement, such as moving from labour-intensive car production to automated car production.

Competition Policy

Government actions aimed at preventing monopoly power to ensure more firms supply goods and services, thereby increasing the potential output of the economy.