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The four Factors of Production are: Land, Labour, Capital, Enterprise.
LAND is anything provided free by nature, which helps in the production of goods and services. It includes minerals, climate, wind power and so on.
Land is fixed in supply and has zero cost of production because it is provided free by nature.
Land is price determined rather than price determining.
The return of Land is Rent.
LABOUR is defined as all human effort and skill used in the production of goods and services.
Labour is fixed in supply and determined by a number of factors: School leaving age, availability of university places, retirement age, length of working week, size of population, labour force participation rate.
Unions can control the price of labour(wages) or the quantity of labour supplied, but not both.
The return to Labour is Wages.
CAPITAL is any human-made item that helps the production of goods and services, e.g. machines.
The Marginal Efficiency of Captial is the extra profit earned by the firm as a result of employing one extra unit of capital.
Investment is the purchase of new capital goods and is an addition to the capital stock of the economy. Capital is the stock of investments already available in the economy. It is the stock of wealth.
The return to Capital is Production.
ENTERPRISE is the individual who organises the other 3 factors of production into a productive unit in order to produce goods and services.
The entrepreneur is a vital factor of production(being a wealth and job creator) and is a huge source of tax revenue for the government. The entrepreneur also earns foreign currency for the country by exporting. Through competition the entrepreneur ensures that resources are used efficiently.
He/She takes insurable and uninsurable risks (e.g. the risk of losing his capital and his good name). Uninsurable risks include the following:
If there is a change of taste/fashion, strikes that will interrupt production and cause lost customers/orders, the entry of new firms which will drive down price, sudden increases in costs(such as when the Euro falls in value).
The return to Enterprise is Profit.
