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The central economic problem is that of scarcity. Given that there is a limited supply of factors of production, it is impossible to provide everybody with everything they want. Potential demands exceed potential supplies.

Factors of production are the inputs into the production of goods and services. The four factors of production are:


This factor is the natural resource.

Examples: Surface of the earth, lakes, rivers, forests or the area of land that makes up a farm or factory.

The reward for owning land is the income that is generated.


This factor is the human resource

The basic determinant of which is the nation’s population.

The reward for labour is the wage or salary that is paid.


This factor is any man-made aid to production.

Capital consists of all those inputs that have each had to be produced in the first place.

Capital goods help land and labour produce more units of output – they improve the output from land and labour.

Examples: factories, machines, transportation and other equipment.

The reward to capital is the rate of return that is earned. These three factors are organised into units of production by firms.


This factor carries out two functions.


organises the other three factors of production.

involves taking the risk of production

The return for enterprise is the profits that are made.

Examples of factors of production

Land – raw materials

Fruit, vegetables, and meat- agricultural products.
Commercial real estate - land on which factories can be built.

Labour (human resources)

Full-time, part-time, temporary, and permanent employees 
Full-time, part-time, temporary, and permanent employees 

Management Capital (man-made resources)

Tractors, spades, and other machinery
Computers and phones
Factory, office block, assembly line
Public infrastructure – communication and roads needed to transport goods across the country.
Public infrastructure – communication and roads needed to transport goods across the country.
Entrepreneurs (individuals who bring factors of production together

Entrepreneurs such as Anita Roddick, Bill Gates, and Richard Branson are examples of entrepreneurs.
Finance - To get started, entrepreneurs need money — either savings or bank loans.

Combination of factors of production

Processed food

The entrepreneur will require land to build a plant.
They will need to invest heavily in capital - machines and instruments to blend the raw ingredients into the completed food product. To benefit from economies of scale, they will need to create a huge plant for mass production.
With a large factory, the company will need to hire specialised labour to work on and operate the machines.
The industry is relatively complicated and will necessitate some specialisation, with workers focusing on a variety of jobs ranging from technology innovation to marketing and design.
This will be a relatively capital-intensive industry. (Capital accounts for a sizable portion of total costs.)

New Tech industries
In emerging high-tech fields such as software development. The most important factor is human capital, which includes workers' experience, education, and abilities.
There is opportunity for an individual or small team to start a firm focusing on a certain component of building new software. This industry may not necessitate the purchase of land; the entrepreneur could work from home or an internet cafe.

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Economics notes  on

Factors of production

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