Factors of Production and the PPC Diagram: Question 1
Syllabus 1.2
Amara runs a small candle-making workshop. She uses $15,000 of her own savings to fund an expansion, taking on the risk that it might fail if sales do not increase. She organises the day-to-day running of the business, deciding what candles to make and how to combine her staff, equipment and materials to make them.
What is the correct term for the reward Amara receives for performing this role in the workshop?
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Worked solution
Step 1: Identify which factor of production Amara represents
Amara is not simply supplying her own labour for a wage, nor is she lending out land or capital for someone else to use. Instead, she is organising the other factors of production (combining her staff (labour), equipment (capital) and materials) and she is personally bearing the risk that the expansion might fail. Organising production and bearing risk is exactly the role of the factor of production called enterprise, and Amara herself is acting as the entrepreneur.
Step 2: Match the factor to its correct reward
Each factor of production earns a distinct type of reward:
- Land → rent
- Labour → wages
- Capital → interest
- Enterprise → profit
Since Amara is providing enterprise, her reward is profit. Whatever is left over from the business’s revenue once all other costs (wages, rent, interest) have been paid.
Step 3: Rule out the other options
- Wages (A) reward labour, not the risk-bearing, organising role Amara performs.
- Rent (B) rewards land, which is not what Amara is providing here.
- Interest (C) rewards capital (for example, a bank that lends money to a business) not the entrepreneur who organises the business and risks their own money.
Final answer
Amara is performing the role of enterprise: organising the workshop’s other factors of production and bearing the risk of the expansion. The correct reward for enterprise is profit, so the answer is option D.