Published by Patrick Mutisya · 14 days ago
In order to produce goods and services, an economy requires four essential inputs, known as the factors of production:
Each factor receives a specific type of income for its contribution to the production process. These rewards are:
| Factor of Production | Reward | Source of Reward | Typical Example |
|---|---|---|---|
| Land | Rent | Payment for the use of natural resources. | Payment to a farmer for the use of farmland. |
| Labour | Wages (or Salaries) | Payment for the time, effort and skill of workers. | Hourly wage paid to a factory worker. |
| Capital | Interest | Payment for the use of borrowed funds or capital equipment. | Interest on a loan taken to buy a delivery van. |
| Enterprise | Profit | Residual income after all other costs have been paid. | Net earnings of a small business owner. |
Rent is earned by owners of land and natural resources. It reflects the scarcity of the resource and the income that could be earned elsewhere (opportunity cost). In competitive markets, rent tends toward the marginal productivity of the land.
Wages compensate labour for the time and effort supplied. They are influenced by:
Interest is the price paid for the use of capital (money or physical assets). It serves two purposes:
Profit is the reward to entrepreneurs for organising production, taking risks and innovating. It is calculated as the difference between total revenue and total cost:
\$\pi = TR - TC\$
where \$\pi\$ is profit, \$TR\$ is total revenue and \$TC\$ is total cost. Positive profit signals that resources are being used efficiently, while losses may indicate over‑capacity or poor management.
Factor markets operate similarly to product markets. The price of each factor (rent, wages, interest, profit) is determined by the interaction of supply (availability of the factor) and demand (desire of firms to employ the factor). Changes in technology, population, or government policy can shift these curves, affecting the rewards earned.