5.1 Factors of production
KE Y I DEA
The four factors of production are land, labour, enterprise and capital.
Land This means the land itself, and any natural resources that come with it. So oil, natural gas, bauxite, fertile soil, a pleasant climate and sandy beaches are all included in this factor of production. Every business uses some physical space – though, for example, a bank or small home-based business uses much less land than an agricultural business growing sugar. In economic terms, river and marine resources also count as land, for example fish, fresh water, or hydro-electric potential from a fast-flowing river. Economists use the word “rent” to describe the earnings from land as a factor of production – even if it does not take the form of a regular weekly or monthly rent payment. Land and natural resources are in limited supply. The level of rent is related to scarcity. There is a high rent for resources such as: land in the central business district of the capital city beach-front land with roads and utilities rights to extract minerals, such as oil and gold.
Labour This means human effort in any form – skilled or unskilled, manual or intellectual. Labour earns wages or a salary in return for participation in the business.
The financial capital used to establish the business earns interest. The interest is paid to the lender, who may be a bank, another institution, or an individual lender. Borrowings of financial capital are called debt. Fixed capital is capital tied up in fixed assets, for example buildings, machinery, or vehicles. These assets will have been acquired with financial capital. Working capital is capital used for day-to-day operations. It includes cash held in the bank, goods for sale, materials for processing and capital for other short-term requirements. Working capital is used to cover wages and immediate requirements, such as utility bills. Venture capital is risk capital invested