IGCSE Economics 0455: Classifying the Four Factors of Production

Priya runs a small tailoring business that makes and alters clothing to sell at a local market. To expand, she uses $20,000 of her own savings to fund the project, accepting that she may lose this money if the expansion does not succeed. She rents a larger unit on a plot of land at the edge of town, buys a new industrial sewing machine and a fabric-cutting machine, and hires two more tailors to work alongside her.

(a) Identify, from the passage, one example of each of the four factors of production used by Priya's business: land, labour, capital and enterprise. [4]

(b) State the reward earned by (i) the land factor and (ii) the capital factor used by the business. [2]

Part (a): Identifying the four factors of production

Land: the plot of land at the edge of town where the larger unit is built. Land covers the natural resources used in production, including the site itself.
Labour: the two extra tailors Priya hires. Labour is the human effort, physical and mental, used in production.
Capital: the new industrial sewing machine and fabric-cutting machine. Capital is manufactured resources used to help produce other goods, rather than being consumed directly.
Enterprise: Priya’s own role organising the expansion, deciding how to combine the land, labour and capital, and risking her own $20,000 of savings if the expansion fails.

Part (b): Rewards to land and capital

(i) The reward to land is rent.

(ii) The reward to capital is interest.

(Labour is rewarded with wages, and enterprise with profit, but these are not asked for here.)

Part (c): Why Priya’s role is enterprise, not labour

Labour is the factor of production that supplies effort or skill in exchange for a fixed reward (a wage), without bearing responsibility for whether the business as a whole succeeds or fails. Priya’s role in the expansion is different: she is the one organising all of the other factors (deciding what machines to buy, what unit to rent, and how many extra tailors to hire) and she is doing so with her own $20,000 of savings, which she stands to lose entirely if the expansion is unsuccessful. Bearing this uninsured risk, and coordinating the other factors of production, is precisely what defines enterprise rather than labour, even though Priya may also do some sewing herself.

Final answers

(a) Land = the plot of land; Labour = the two extra tailors; Capital = the sewing machine and fabric-cutting machine; Enterprise = Priya organising the expansion and risking her savings.
(b) (i) Rent (ii) Interest
(c) Priya’s role is enterprise, because she organises the other factors of production and personally bears the risk of the expansion failing, rather than simply supplying effort for a fixed wage.