What resources do firms combine to make goods and services?
The four factors of production (land, labour, capital and enterprise), the rewards to each factor, and how the quantity and quality of factors affect what an economy can produce.
A focused answer for AQA GCSE Economics on the four factors of production, the reward earned by each, and how factor quantity and quality determine an economy's productive potential.
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What this dot point is asking
AQA wants you to name and define the four factors of production, state the reward earned by each, and explain how the quantity and quality of these resources determine how much an economy can produce. This underpins the whole specification, because every good and service is made by combining these four resources.
The four factors of production
- Land is all natural resources, such as fields, water, oil, minerals, fish stocks and forests. It includes anything provided by nature that can be used in production.
- Labour is the human effort, both physical and mental, used in production. The size and skill of the workforce both matter.
- Capital is the man-made goods used to produce other goods, such as machinery, tools, factories, vehicles and computers. Note that in economics capital means physical equipment, not money.
- Enterprise is the willingness of entrepreneurs to take risks, organise the other three factors and innovate. The entrepreneur decides what to produce and bears the risk of failure.
The reward to each factor
These rewards are the incomes that flow to the owners of resources, and they are also costs to the firms that hire the factors. The link runs both ways: a worker's wage is the household's income but the firm's labour cost.
Quantity and quality of factors
An economy can produce more if it has more factors or better factors:
- Quantity: discovering new oil reserves (more land), a larger or higher-participation workforce (more labour), or building more factories (more capital).
- Quality: training and education raise the quality of labour; new technology raises the quality of capital. Better quality usually raises productivity, the output per unit of input.
Higher productivity lowers average costs, raises the economy's productive potential, and is shown as an outward shift of the production possibility frontier (more of everything can be produced).
Productivity
Productivity is the single most important driver of long-run living standards, because it allows wages to rise without raising prices and lets firms compete on cost. It is improved by investment in capital, training, better management and new technology.
Worked example
Try this
Q1. State the four factors of production. [2 marks]
- Cue. Land, labour, capital and enterprise.
Q2. Explain how improved capital could raise an economy's output. [3 marks]
- Cue. Better machinery raises productivity, so more is produced from the same labour, increasing total output.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20186 marksExplain how an increase in the quality of labour could increase what an economy is able to produce.Show worked answer →
The quality of labour is improved through education, training and better health, which raises productivity, the output produced per worker per hour.
If each worker produces more, the same number of workers can produce a greater quantity of goods and services, so the economy's productive potential rises. This can be shown as an outward shift of the production possibility frontier.
Higher productivity also tends to lower a firm's average costs, which can make domestic firms more competitive. A 6 mark answer links the cause (better training) to the effect (more output per worker) and then to the wider economy.
AQA 20204 marksOutline what is meant by the factor of production enterprise and state its reward.Show worked answer →
Enterprise is the factor of production that involves taking risks and organising the other three factors (land, labour and capital) to produce goods and services. Entrepreneurs decide what to make, raise the finance, and bear the risk of loss if the business fails.
The reward to enterprise is profit, the surplus left after all other costs are paid. Markers reward a clear definition that mentions risk-taking and organising the other factors, plus correctly naming profit as the reward (not wages or interest).
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Sources & how we know this
- AQA GCSE Economics (8136) specification — AQA (2017)