Factors of Production and their Rewards

To produce adequate goods for the satisfaction of human wants a combination of natural and artificial and human resources must be present. These economic resources are referred to as factors of production. The natural resources are represented by land (primary) and the artificial resources by the capital (secondary), and the human resource by labor (primary) and the entrepreneur (secondary).

1) Land

Land is one of the most important factors of production. It is used for various purposes to product goods and services. For example, land can be used for agriculture to produce food, fruits and vegetables; which can then be sold in the market to fetch income. Land can also be leased and used to construct offices and premises for companies and businesses.


  • Land is used to refer to all the natural resources below or above the earth’s surface that are needed to support production. They are sometimes referred to as gift of nature because they occur naturally.
  • Another important characteristic of land as a factor of production is that it is a basic factor of production. It is needed for other factors of production to work.
  • Lacks geographical mobility (immobile): Land cannot be moved from one place to another, or from one geographical location to another.
  • Quality is not homogenous: land as a factor of production differs in terms of quality from one place to another. The quality of land in Nakuru City is not the same as the quality of land in Kisumu; that is why the price of land vary from one place to another.
  • Can be put in various uses: Land can be put into several uses, including agricultural practices, construction, and mining.
  • Supply of land is fixed. However some resources can get depleted e.g. forests, lakes etc.
  • Quality can be improved for better use: The quality of land can be improved to make it more useful for economic purposes. For instance, a swampy land can be regenerated and turned into a dam to supply water for people and livestock.
  • The reward  of land is rent: People pay rent to enjoy the use of land.
  • Human being can increase the productivity of land using greater units of labor capital, application of fertilizers, gabions, mixed farming, intercropping, afforestation, crop rotation, controlling soil erosion, giving land sometime to gain fertility.
  • Land as a factor of production is also subject to law of diminishing marginal returns.

2) Capital

Capital as a factor of production refers to all the artificial resources used for production of goods and services. Capital can either be fixed or circulating. They include machines and technologies used in factories to turn inputs into output.

Characteristics of Capital

  • It is manmade: Capital is created by man to be used alongside land and labor to produce goods and services.
  • Like land, capital is also a basic factor of production because people cannot work without capital to produce output.
  • The reward for capital is interest
  • It’s subject to depreciation/decreasing value
  • Usually not consumed in its production process.

3) Labour

This is the mental (doctors and teachers) or physical (farm workers) human effort exercise in the production process for a reward.

Characteristics of Labour

  • Labor is also basic factor of production
  • It cannot be separated from the provider: the person who performs a specific task is the source of labor that is needed for production.
  • A laborer sells his/her labor and not himself.
  • Labor is mobile geographically and occupationally: People can move from one place to another with their labor.
  • Productivity can be increased by motivating workers through either rewards, challenging tasks, and other methods of motivation.
  • The reward for labor is salary (fixe amount), wage (temporary) or commissions, fees (usually a pre-determined amount) earned to professionals for services rendered to clients in their private practice e.g. doctors, lawyers, accountants and architects.
  • Can be skilled or semi-skilled

4) Entrepreneur

This is the person who comes up with a business idea.

Characteristics of an entrepreneur

  • Entrepreneur is also a basic factor of production
  • Brings all the required resources together in a bid to start and operate a business with a view of earning profit.
  • Reward is profit: Entrepreneurs create business ideas and engage in business activities to produce goods and services, which they then sell for profit.
  • A distinct factor of production which must be distinguished from specialized labor.
  • Entrepreneurs differ in ranges of self-employed (kiosk owners), opportunistic (hire others), inventors (mpesa, Ipads), pattern multipliers (supermarkets + petrol stations), economies of scale exploiters (hawkers sell at discount so as to increase turn over), acquirers (uchumi),buy-sell artist, speculators, artisans/craft man (beautician/mechanic), intrapreneurs (James mwangi, Bob Collymore, Michael Joseph)

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