What does it take to make a plate of rice and curry?
The last lecture ended with a promise. Every choice uses resources such as land, workers and machines, and the next lecture would look at those resources one by one. This is that lecture.
Go back to the school canteen and the plate of rice and curry that you chose. It looks like one simple thing. Now follow it backwards. The rice grew in a field, with water and sunshine. Farmers planted and harvested it. A tractor ploughed the field, and a truck carried the rice to the city. In the canteen, a cook used a stove, pots and knives, and a server handed you the plate across a counter. And someone decided to open the canteen at all. That person found the space, bought the stove, hired the cook, and took the risk that students would buy the food.
That is a long list. Yet economists say that everything on it belongs to one of only four groups. Once you can see the four groups, you can take apart any product in the world: a phone, a bus ride, a school, or a hospital operation.
The four factors of production
A factor of production is a resource used to produce goods and services. There are four, and each one answers a different question about where production comes from.
Land means everything that nature provides. It includes the ground itself, but much more: soil, rivers and rain, forests, minerals and oil under the ground, fish in the sea, and even a good harbour. The test for land is simple. Did people make it? If nature made it, it is land. The word sounds narrow, but in economics the sea is land too.
Labour means human effort, both physical and mental. The farmer, the cook, the truck driver, a teacher, a nurse and a computer programmer all provide labour. Labour has a quantity and a quality. The quantity is how many people work and for how many hours. The quality is the skill they bring. Skills come from education and practice, and economists sometimes call them "human capital". But skill is still part of labour, because it lives inside a person.
Capital means goods made by people that are used to produce other goods and services. The tractor, the truck, the stove, the pots, the counter and the canteen building are all capital. Two tests decide whether something is capital. First, people made it. Second, it is used to produce something else, again and again, rather than being used up at once.
Enterprise means organising the other three factors and taking the risk. Some books call it "entrepreneurship", and the person who provides it is an entrepreneur. The entrepreneur decides what to produce and how. Then they bring land, labour and capital together, and pay for them before they know whether anyone will buy. If customers come, the entrepreneur gains. If they do not, the entrepreneur loses.
The four factors of production are the resources used to produce goods and services.
Land: everything provided by nature. Labour: human effort, physical and mental. Capital: goods made by people and used to produce other goods. Enterprise: organising the other three and taking the risk.
A baker buys a bag of flour and an oven. Both are made by people, and both are used to make bread. Are both capital?
Show the answer
No. Only the oven is capital. The oven bakes bread day after day, for years. The flour disappears into the bread the first time it is used. Things that are used up in this way are called materials. They are not a fifth factor. They were themselves produced by other firms, with their own land, labour, capital and enterprise. A flour mill used wheat fields, millers, machines and an owner to make that flour.
Money is not capital
In everyday speech, people say that someone "put capital into a business", and they mean money. In economics, this word has a narrower meaning, and it is worth seeing why.
Imagine $20 000 sitting in a drawer in an empty shop. Nothing is produced. The money cannot bake bread, cut hair or carry passengers. Now spend it: buy an oven, rent the shop, hire a baker. Bread appears. The oven produces, the baker produces, the shop space is used. The money did not produce anything itself. It was only the way to get hold of the factors that do.
So money is not a factor of production. It is a claim on factors. Economists sometimes call money set aside for a business "financial capital", to keep it apart from the machines and buildings, which are "physical capital". When this course says "capital" on its own, it always means the machines, tools and buildings.
That is it. That is the whole idea. A factor of production is something that does the producing: nature's resources, people's effort, people-made tools, and the person who brings them together.
Sorting the resources
The tests are easy to state and easy to forget under pressure. Practise them on the cards below. Two of the cards are neither factor.
All of these are used by a small fishing business. Choose a card, then choose its box. Read the reason after each choice.
This table sorts the resources used by a small fishing business into the four factors, with the reason for each.
| Resource | Factor | Reason |
|---|---|---|
| The fish in the sea | Land | Made by nature, not by people. |
| The sheltered harbour | Land | Nature shaped it. |
| The fishing boat | Capital | Made by people, used again and again. |
| The nets and the cold store | Capital | Made by people, used for years. |
| The crew's work | Labour | Human effort. |
| The skipper's skill in finding fish | Labour | A skill lives in a person. |
| The owner, who borrowed to buy the boat and decides where to fish | Enterprise | Organises the factors and takes the risk. |
| The diesel fuel | None (a material) | Used up on each trip. |
| The $15 000 loan in the bank | None (money) | It buys factors but produces nothing itself. |
The fuel and the loan are the two cards most students place wrongly. Both feel important to the business, and both are. But one disappears on each trip, and the other only buys the things that do the work.
Every factor earns a reward
Factors are scarce, so nobody hands them over for nothing. Each factor is paid, and economists give each payment its own name.
| Factor | Its reward | Example |
|---|---|---|
| Land | Rent | A farmer pays the owner of a field for using it. |
| Labour | Wages | The cook is paid for each hour or month of work. |
| Capital | Interest | A bank lends the money to buy an oven, and is paid interest for it. |
| Enterprise | Profit | The owner keeps what is left after everyone else is paid. |
Two of these names need care. In everyday life, "rent" is any payment for using a property. The rent for a shop pays for the land and also for the building on it. In economics, rent is strictly the reward for land. Interest is the reward for capital because capital has to be paid for before it produces anything. Someone must give up the use of their money for years, and interest is what they receive for waiting.
Notice how the four rewards are fixed. Rent, wages and interest are agreed in advance: the cook is paid whether or not the canteen sells much that day. Profit is different. It is what remains after everyone else has been paid, and it can be less than zero. A negative profit is called a loss. This is exactly what "taking the risk" means. Try it with the bakery below.
A small bakery sells loaves at $2 each. Flour and other materials cost $0.50 a loaf. Each month it pays $1 500 rent, $4 000 in wages to two bakers, and $300 interest on the loan for its oven. Change the number of loaves sold this month and watch who is paid what.
Loaves sold:
This table shows the bakery's month at three levels of sales. Sales are $2 a loaf, materials $0.50 a loaf, and rent, wages and interest together $5 800 a month, whatever the sales.
| Loaves sold | Sales | Materials | Rent + wages + interest | Profit (−: loss) |
|---|---|---|---|---|
| 3 000 | $6 000 | $1 500 | $5 800 | −$1 300 |
| 4 000 | $8 000 | $2 000 | $5 800 | $200 |
| 6 000 | $12 000 | $3 000 | $5 800 | $3 200 |
The landlord, the bakers and the bank are paid the same in every month. Only the owner's profit changes, and below about 3 867 loaves it becomes a loss. The model leaves out taxes, changes in the price of flour, and the value of the owner's own time.
At 6 000 loaves, the owner keeps $3 200. At 3 000 loaves, the owner loses $1 300, while the landlord, the bakers and the bank are paid in full. That is why profit is the reward for enterprise. It is the payment for carrying the risk that the others do not carry.
Worked examples
Meera runs a tea stall at a bus station. She rents a small space on the pavement, uses a gas burner, two kettles and twenty cups, and buys tea leaves, milk and sugar each morning. Her cousin Arun helps her in the busy hours, and she pays him by the hour. Sort her resources into the four factors. (This example is invented.)
Think first. Ask the tests in order. Did nature make it? Is it human effort? Did people make it, to use again and again? Who organises it and takes the risk?
Land: the space on the pavement, the site her stall stands on. The water in the kettle also comes from nature.
Labour: Arun's work, and Meera's own work when she pours tea.
Capital: the burner, the kettles and the cups. People made them, and she uses them every day.
Enterprise: Meera, who decided to open the stall, chose the bus station, and bears the risk of a rainy, empty day.
Not factors: the tea leaves, milk, sugar and gas are materials. They are used up in each cup.
Check. Notice that the tea leaves are not land, even though they grew from the ground. They were produced by a tea farm, which used its own land, labour, capital and enterprise. Also notice that Meera provides two factors. One person can be both the worker and the entrepreneur. ✓
Ana has $20 000 in a savings account that pays 4% interest a year. She takes it out and buys an oven and a counter for a new bakery. In its first year, the bakery makes a profit of $9 000, after paying rent, wages and materials. Ana works in the bakery full time, and she gave up a job that paid $7 500 a year. Was the bakery worth it? (This example is invented.)
Think first. Ana used two of her own resources: her money and her time. Neither was free. Use the idea of opportunity cost from the last lecture.
Interest she gave up: dollars a year. This is the opportunity cost of using her own money.
Wage she gave up: $7 500 a year. This is the opportunity cost of her own labour.
Together: dollars. The bakery's profit, $9 000, is more than this by dollars.
So the bakery was worth it, but only just. Most of the $9 000 is really the reward for Ana's own money and her own work. Only about $700 is the extra reward for her enterprise.
Check. . ✓ This shows why money that is not borrowed still has a cost. Even when no bank is paid, the owner gives up the interest the money could have earned.
The situation. For nearly five hundred years, fishing for cod was the centre of life in Newfoundland and Labrador, on the east coast of Canada. After the Second World War, fishing changed. Better nets and sonar found the fish, and large "factory freezer" trawlers could stay at sea for months. Even before 1977, the harvestable stock of cod had fallen by an estimated 82% between 1962 and 1977.
The policy. On 1 January 1977, Canada extended its fishing limits to 200 nautical miles (370 km) from its coast. Foreign boats had to leave, and the cod inside the limit were left to Canadian fishers.
The prediction. Look at the factors. Labour and capital poured in. Between 1975 and 1980, the number of fishers in Newfoundland rose from 15 000 to 35 000, and the number of fish processing plants rose from 110 to 175. More labour and capital can raise the catch, but only as long as the land lasts. Here the land is the fish stock. A fish stock renews itself only if each year's catch is smaller than the number of new fish that grow up. Take more than that, and the stock shrinks, however many boats there are.
| Newfoundland | 1975 | 1980 |
|---|---|---|
| Fishers | 15 000 | 35 000 |
| Fish processing plants | 110 | 175 |
What happened. In the 1980s, the government's estimates of the remaining cod were too high, and catch limits were set too high as well. By 1992, the breeding stock of northern cod had fallen to about 1% of its estimated peak. On 2 July 1992, the Canadian government banned cod fishing along its east coast. It was meant to last two years. It lasted more than thirty. About 40 000 fishers and related workers were affected, and nearly 30 000 people in Newfoundland and Labrador lost their jobs. In the first ten years of the ban, the province's population fell by about 10%. A commercial cod fishery was allowed again only in 2024. (Source: The Canadian Encyclopedia, "Cod Moratorium of 1992".)
Verdict. The prediction was right, and painfully so. The boats, plants and workers were still there in 1992. What ran out was the one factor that people cannot make: the land, in the form of the fish. Capital and labour can help nature produce more, but they cannot replace it. When land is used faster than nature renews it, the other factors lose their work too.
After 1992, the trawlers and processing plants in Newfoundland were still in perfect working order. Were they still capital?
Show the answer
Yes, they were still capital, because they were made by people to produce other goods. But capital produces nothing on its own. It needs the other factors to work with. Without fish, a trawler has nothing to catch. Some boats and plants later moved to other work, such as catching crab and shrimp. Factors are useful only in combination.
Three traps
In economics, capital means machines, tools, vehicles and buildings used in production. Money buys them, but money itself produces nothing. If an exam answer says "capital, such as money", it has used the everyday meaning, not the economic one.
Flour, fuel, cement and tea leaves are used up as soon as they are used. They are materials, produced by other firms from their own factors. A factor is used again and again, like a field, a worker or an oven.
A manager who is paid a fixed salary provides labour, even if she gives orders to everyone else. Enterprise belongs to the person who carries the risk and keeps the profit, or bears the loss. In a small business, that is usually the owner.
Work each one on paper first. Open a hint only when you are stuck.
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A farm grows mangoes. Sort these into land, labour, capital, enterprise, or not a factor: (a) the orchard's soil, (b) the pickers, (c) the irrigation pump, (d) the fertiliser, (e) the rain, (f) the farmer who borrowed money to plant new trees and decides when to sell.
Hint 1
Use the tests: made by nature, human effort, made by people and used again and again, or organising and risk.
Hint 2
Fertiliser is made by people. Is it used again and again, or used up?
Full answer
(a) Land: made by nature. (b) Labour: human effort. (c) Capital: made by people and used every season. (d) Not a factor: fertiliser is a material, used up once it is spread. (e) Land: rain is provided by nature. (f) Enterprise: the farmer organises the factors and carries the risk. Check: every item that is made by nature is land, and the only item used up at once is not a factor. ✓
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Name the reward in each case: (a) Mr Osei is paid $900 a month by a farmer who grows vegetables on his field. (b) Lina is paid $12 an hour to drive a delivery van. (c) A bank receives $400 a year on a loan used to buy a sewing machine. (d) After paying everyone, Kenji's shop has $2 000 left over at the end of the year.
Hint 1
First find which factor is being paid in each case.
Hint 2
Land earns rent, labour earns wages, capital earns interest, enterprise earns profit.
Full answer
(a) Rent: payment for the use of land. (b) Wages: payment for labour. (c) Interest: payment for the money that bought the capital. (d) Profit: what is left for the entrepreneur after all the others are paid. Check: each case names exactly one factor and its one reward. ✓
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A juice stall sells cups of juice at $3 each. Fruit and cups cost $1 for each cup sold. Each month, rent, wages and interest come to $6 000 in total. (a) How many cups must it sell in a month to break even? (b) What is the profit or loss if it sells 4 000 cups? (c) If it sells 2 500 cups? (These numbers are invented.)
Hint 1
Each cup brings in $3 and uses $1 of materials. How much does each cup leave towards rent, wages and interest?
Hint 2
Each cup leaves $2. Divide $6 000 by $2 for part (a).
Full answer
(a) Each cup leaves dollars, so the stall breaks even at cups. (b) , a profit of $2 000. (c) , a loss of $1 000. Check (b) in full: sales , materials , others , and . ✓ The landlord, the workers and the bank receive the same $6 000 in every case; only the owner's result changes.
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A rice farm can grow the same crop in two ways. Method A uses 10 workers and a small tractor. Method B uses 4 workers and a large tractor, which costs $40 000 a year more to own and run than the small one. (a) Each worker costs $6 000 a year. Which method is cheaper? (b) Wages rise to $8 000 a year. Which method is cheaper now? (c) What does this tell you about how firms combine labour and capital? (These numbers are invented.)
Hint 1
Method B saves 6 workers, but costs $40 000 more for the tractor. Compare the two amounts.
Hint 2
In (a), 6 workers cost . In (b), they cost .
Full answer
(a) Method B saves dollars of wages, but the large tractor costs $40 000 more. So Method A is cheaper, by $4 000. (b) Now Method B saves dollars of wages, against $40 000 more for the tractor. So Method B is cheaper, by $8 000. (c) The same crop can be produced with different mixes of factors. When labour becomes more expensive, firms switch towards using more capital and less labour. Economists call this substituting one factor for another. Check: and . ✓ Notice that the four workers who lose their jobs in (b) do not disappear from the economy. The question is whether another use can be found for their labour.
Every income in an economy is the reward of some factor. The wages your family earns, the rent a landlord receives, the interest on savings and the profit of a business owner are all payments for land, labour, capital or enterprise. Households own the factors, firms hire them, and the rewards flow back to households, who spend them. A later lecture draws this as a circle of spending and income.
Factors also explain how much a country can produce. At any moment, a country has only so much land and only so many skilled workers. It also has a fixed stock of machines and buildings, and a limited number of people willing to take risks. Together, these set a limit on what can be made. The next lecture draws that limit as a curve, and shows why producing more of one thing means producing less of another. Later, you will see that an economy grows when it finds more factors, or better ways to combine them. The northern cod shows the other side: an economy can also shrink when it uses up a factor that nature does not quickly replace.
- The four factors of production are land, labour, capital and enterprise, and every good or service is made by combining them.
- Land is everything provided by nature, labour is human effort and skill, capital is goods made by people to produce other goods, and enterprise is organising the factors and taking the risk.
- Money is not capital in economics, and materials that are used up at once, such as flour or fuel, are not factors of production.
- The rewards are rent for land, wages for labour, interest for capital and profit for enterprise, and profit can be negative, which is a loss.
- Factors work only in combination, and when one runs out, as the northern cod did, the others lose their work too.