Land, labour, capital and management
To produce anything, farmers combine four factors of production. Each gets a reward.
| Factor | Meaning | Reward | Example |
|---|---|---|---|
| Land | Natural resources: soil, water, climate | Rent | A farm plot |
| Labour | Human effort, physical and mental | Wages | Planting, weeding, milking |
| Capital | Man-made goods used to produce more | Interest | Tractor, seeds, fertiliser, buildings |
| Management (entrepreneurship) | Organising the other factors and taking the risk | Profit | The farmer’s decisions |
Characteristics of the factors
| Factor | Features |
|---|---|
| Land | Fixed in supply, immobile, not man-made, varies in fertility |
| Labour | Varies in skill; cannot be separated from the person; can be improved by training |
| Capital | Man-made; wears out (depreciates); can be fixed (machines, buildings) or working (seeds, feed) |
| Management | Takes risks, makes decisions, plans |
Law of diminishing returns
If more and more of one input (such as labour or fertiliser) is added to a fixed amount of the others, the output at first rises quickly, but then each extra unit adds less and less, and at last may even reduce output. The farmer should stop adding when the extra cost of an input is greater than the extra income from it.
Try itOutput from adding labour
On a 2-hectare plot, output = 40 × √(workers) bags. Choose the number of workers, the price and the wage.
Key terms
- Factors of production
- The resources used to produce goods: land, labour, capital and management.
- Rent
- Payment for the use of land.
- Capital
- Man-made goods used in production.
- Diminishing returns
- Falling extra output from additional input.
Summary
- Land, labour, capital and management are the factors of production.
- They are rewarded by rent, wages, interest and profit.
- Capital may be fixed or working.
- Adding more of one input gives diminishing returns.