Factors of Production and the PPC Diagram: Question 6
Syllabus 1.2
Mr. Okafor owns a plot of grazing land on the outskirts of town. He does not farm the land himself. Instead, he allows a local dairy farmer, Beatrice, to graze her cattle on it, and she pays him a fixed amount every month in return.
What is the correct term for the payment that Mr. Okafor receives for allowing Beatrice to use his land?
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Worked solution
Step 1: Identify which factor of production Mr. Okafor is supplying
Mr. Okafor is not working for Beatrice, lending her money, or organising her dairy business. He is simply allowing her to use a natural resource he owns, a plot of grazing land, in exchange for a payment. Supplying a natural resource like this is exactly what the land factor of production means in economics.
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 Mr. Okafor is supplying land, the payment he receives is called rent.
Step 3: Rule out the other options
- Wages (A) reward labour. Mr. Okafor is not working for Beatrice or supplying effort to her business.
- Interest (B) rewards capital, such as money lent by a bank. Mr. Okafor is not lending money.
- Profit (D) rewards enterprise. Mr. Okafor is not organising Beatrice’s dairy business or bearing any of its risk; Beatrice herself does that.
Final answer
Mr. Okafor is supplying the land factor of production by allowing Beatrice to use his grazing land. The correct term for his reward is rent, so the answer is option C.