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Difficulty: Very hardFactors of Production and Their Rewards

Match each economic description of factor characteristics and functions with its corresponding economic reward.

  • Return accrued to a primary factor whose total aggregate supply is completely inelastic and permanently fixed by nature.Economic Rent
  • Compensation for human physical or mental effort, evaluated specifically in terms of the volume of goods and services it can command.Real Wages
  • Payment received for deferring present consumption to accumulate man-made durable assets used in further wealth creation.Interest
  • Residual economic surplus earned after satisfying all contractual obligations, serving as compensation for bearing uninsurable business uncertainties.Profit

Answer

Natural inelastic supply corresponds to Economic Rent; labor output evaluated by purchasing power corresponds to Real Wages; reward for capital accumulation through deferred consumption corresponds to Interest; and residual return for bearing uninsurable risk corresponds to Profit.
Each factor of production has distinct economic characteristics and corresponding rewards: Land is inelastic in aggregate supply and earns Rent; Labour compensation measured by purchasing capacity is Real Wages; Capital is man-made wealth yielding Interest for deferred consumption; and Enterprise earns Profit as the residual return for undertaking uninsurable risks.

Step-by-Step Solution

1
Analyze the description of a factor whose total supply cannot be expanded by human effort.
Identified Land, whose economic earnings are classified as Rent.
Land is a primary factor fixed in overall quantity by nature.
2
Evaluate labor remuneration adjusted for purchasing power.
Identified Real Wages.
Nominal wages denote monetary figures, while real wages measure the quantity of goods and services that the money can buy.
3
Examine the payment accruing to man-made assets created via saved wealth.
Identified Capital's economic reward, Interest.
Interest compensates owners of capital for liquidity preference and time delay in consumption.
4
Identify the non-contractual residual income earned after all explicit factor payments are made.
Identified Enterprise's reward, Profit.
Unlike fixed contractual payments (wages, rent, interest), profit is variable and rewards uninsurable risk-taking.

Key Concept

Characteristics of factors of production (Land, Labour, Capital, Enterprise) and their specific economic rewards (Rent, Real Wages, Interest, Profit).
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Topics

Factors of Production and Their Rewards

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