The Factors of Production (Edexcel IGCSE Economics)
Exam board Pearson Edexcel · IGCSEUpdated 2024-06-10
Capital, Labour, Land & Enterprise
Spec point —
1.2.1a
- The factors of production are the resources used by businesses to produce goods and services
The Four Factors of Production
| Capital | Enterprise |
|---|---|
| - Capital includes any man-made **resource **used to produce goods/services - Examples include tools, buildings, machines and computer equipment | - Enterprise involves taking risks when setting up or running a business - An entrepreneur decides on the combination of the factors of production necessary to produce goods/services with the aim of generating profit |
| Land | Labour |
| - This includes** natural resources** and physical locations that are used for production - Some regions have vast supplies of a particular natural resource and are able to specialise in its production, e.g. oil, wood, fish, iron ore | - This includes human input into the production process - Labour involves mental or physical effort - It can be skilled or unskilled - Its effectiveness is determined by education, training & experience workers have |
- The production of any good or service requires the use of a combination of all four factors of production
The combination of factors of production in manufacturing a vehicle
-
In order to produce a vehicle, a business requires
- Capital, including a CAD/CAM system as well as a production line that may use robots
- Enterprise, including the sourcing of finances by the entrepreneur and the ability to manage all of the required factors of production
- Land, including factory premises and storage facilities, as well as a test track to check vehicles meet quality standards
- Labour, including design and production workers, as well as quality testers
Exam Hint In Paper 1, you will be asked to analyse why all four factors of production might be used to produce a particular good/service. Be careful that you do not identify the final good/service (e.g. a mobile phone) as a factor of production.
The Rewards for the Factors of Production
Spec point —
1.2.1a
-
In a free market economic system, the factors of production are privately owned by households or firms
- Households 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
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