What are  Factors of Production?

There are 4 key resources found in an economy. These are:

1. Land

2. Labour

3. Capital

4. Entrepreneurship

Land earns rent and is inelastic which means that it is less responsive to the changes in its price, because of its limited availability. Thus, even when the price of the land increases, its supply cannot be increased.

Capital earns interest

Labour earns wages and salaries

Entrepreneurship earns profit.

These factors of production combined and its relationship bewteen households and businesses compose the Circular Flow model.

Circular Flow Model

How does it work?

The Factor Market are the Factors of Production

The Product or Goods Market are the markets for the output of production

Intermediate Goods & Services are purchased as input to produce Final Goods & Services

Firms pay for land, labour and capital(equity/debt)

Households pay for Goods&Services to Businesses.

This flow of money can be made bigger or smaller by money injections or money withdrawals.

Injections

G – Government Spending – (Public Sector, Education, Healthcare, Roads…)

I – Investment Spending – This is money firms borrow in order to invest in the Economy

X – Export Earnings – Products&Services that leave this economy and goa broad. Money comes back as an exchange.

Withdrawals

T – Taxation – Governament taxation

S – Savings – Banks use savings to lend out to business owners

I – Imports – Money spent from this economy on foreign Goods& Services

By injecting more capital or withdrawing it from the economy, households and businessess are affected in regards to their investment decisions, as these have a large impact on their resources.