The Basic Economic Problem (Unit 1 Topic 1)

Every good and service ever produced was made by combining four resources. Economists call these the factors of production.

 

Land is everything supplied by nature: soil, minerals, water, forests, fish stocks, even rainfall. The owner earns rent for allowing it to be used.

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Labour is human effort applied to production, whether physical or mental. A bricklayer and a software engineer are both supplying labour. It earns wages.

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Capital is anything manufactured in order to produce something else — machinery, vehicles, buildings, tools. The test is purpose. A commercial oven in a pizza shop is capital; the same oven in a home kitchen is a consumer good. Capital earns interest.

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Enterprise organises the other three and carries the risk if the venture fails. Someone who mortgages their house to open a café is supplying enterprise. It earns profit.

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Two points are worth fixing early. First, money is not capital. Money produces nothing by itself — it is a claim on resources that can be exchanged for the machinery and labour that do the producing. Shares are the same: buying them transfers ownership of a business rather than creating anything.

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Second, profit is the only factor income that can be negative. Rent, wages and interest are contractual and owed regardless of performance. Profit is whatever remains afterwards, so it can be a loss — which is precisely the risk that makes enterprise a separate factor.

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Using the interactive

Stage 1 deals you fourteen resources one at a time. Choose the bin each belongs to — including "Not a factor," which some do. Read the explanation on every card, even the ones you get right.

Stage 2 unlocks once the deck is sorted: match each factor to the income it earns.