The Four Factors of Production and Opportunity Cost
Everything is made from scarce resources. Meet the four factors of production, land, labour, capital and enterprise, and the reward each one earns, then learn why every choice has an opportunity cost.
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Everything is made from something
Every good and service you use is made from resources. But resources are scarce: there is never enough to satisfy everything people want. That is the basic economic problem, and it forces everyone to make choices. Economists sort the resources into four factors of production, and every choice made with them has a cost.
The four factors of production
A factor of production is an economic resource used to make goods and services. There are four. Learn each one and the reward it earns.
Match the reward
- Land
- Labour
- Capital
- Enterprise
- Rewarded with rent
- Rewarded with wages
- Rewarded with interest
- Rewarded with profit
Name the factor
A baker uses an oven to bake bread. Which factor of production is the oven?
- Capital
- Land
- Labour
- Enterprise
Match the example
- Land
- Labour
- Capital
- Enterprise
- A forest that supplies timber
- A nurse caring for patients
- A delivery van used by a business
- A founder who risks savings to start a company
Complete the factors
The natural resources used in production are called _____, and the reward for them is _____. The human effort of workers is _____. Machines, tools and factories are _____. The risk-taking person who combines the factors provides _____.
The basic economic problem
Economics starts with one hard fact. Compare the two sides.
What is the problem?
Which sentence best describes the basic economic problem?
- Resources are scarce but wants are unlimited, so choices must be made
- There is not enough money in the world
- People do not want to work hard enough
- Everything should be free for everyone
Opportunity cost
Because resources are scarce, choosing one thing means giving up another. The opportunity cost is the next best alternative that you give up when you make a choice. If you spend an evening revising, the opportunity cost might be the evening out with friends that you gave up.
True about opportunity cost
Which statements about opportunity cost are true? Choose all that apply.
- It is the next best alternative that is given up
- It arises because resources are scarce
- Every economic choice has an opportunity cost
- It is the money left in your pocket
- It only affects governments, not people
Spot the truth
Tap the two statements that correctly describe opportunity cost.
- Opportunity cost is the next best choice you give up.
- Every economic choice has an opportunity cost.
- Opportunity cost is the money left in your pocket.
- Opportunity cost only affects large businesses.
Find the opportunity cost
Put the steps for making a choice and finding its opportunity cost in order.
- List the options the scarce resources could be used for
- Weigh the costs and benefits of each option
- Choose the option with the greatest benefit
- Identify the next best option, which is now given up
- This given-up option is the opportunity cost
Which factor?
Decide which factor of production each example is.
- A field where a farmer grows wheat.
- A tractor used to harvest the wheat.
- The person who set up the farm and took the financial risk.
Explain opportunity cost
Explain what opportunity cost means and give one example from everyday life. Say why it happens.
- Define opportunity cost in your own words
- Give a clear example of a choice and what is given up
- Link it to the idea that resources are scarce