What Are the Four Factors of Production?

The four factors of production are land, labour, capital and enterprise. They are the resources used to produce goods and services. In Cambridge International AS Level Economics, this is part of 1.3 Factors of production, particularly 1.3.1 (the four factors and their definitions) and 1.3.3 (their rewards).

What does each factor mean?

• Land means natural resources used in production, such as farmland, water and minerals. Its reward is rent.
• Labour is the human effort used in production, whether physical or mental. Its reward is wages.
• Capital means human-made resources used to produce other goods and services, such as machinery, tools and buildings. Its reward is interest. This is physical capital: it is different from human capital, which refers to workers’ skills and knowledge.
• Enterprise is the work of the entrepreneur, who organises the other factors of production and takes risks. Its reward is profit.

For example, a bakery may use land to grow wheat, labour to make bread, capital in the form of ovens, and enterprise from the owner who brings these resources together and risks making a loss. Each factor has a different role, even though they all contribute to the finished bread.

The owner might decide how many ovens to use and how many workers to hire. If the bread sells well, profit rewards the owner’s risk-taking; if it does not, the owner could make a loss. That is different from the wages paid to workers for their labour, whether or not the bakery makes a profit.

Common exam mistake: Do not define capital as money. Money can help a firm buy an oven, but the oven is the physical capital used in production. Also, land is broader than a plot of ground: it includes natural resources such as water and minerals.