What are the Rewards for the Factors of Production

Suppliers of factors of production are rewarded or compensated, which varies depending on what factors they supply. If we add up, we know the compensation as factor income. If it is calculated for all economic actors in an economy, it is national income.

Economists say the rewards for factors of production are:


Rent is a reward for land. Landlords can lease their land to producers throughout the economy.

In the perspective of economics, land does not only include agricultural, plantation or industrial areas. But, it also includes the natural resources contained in it, such as various metal minerals, petroleum, and coal. They can be renewable resources, which are abundantly available in nature and non-renewable resources, which can be exhausted if we over-exploit them.


Compensation to workers takes many forms. It can be wages, salaries, and benefits such as insurance and pensions. Wages usually refer to compensation to manual workers, for which they are paid hourly. Meanwhile, salary refers to compensation in a fixed amount, usually paid monthly. If the wages received by workers depend on their total hours worked, it is not on salary. But, in economics, we specifically refer to them all as wages, ie compensation for …

Behavioral Economics: Importance, Concept Examples

What it is: Behavioral economics is the branch of economics that studies how the effects of psychological factors influence and explain economic decision making. It studies the cognitive, emotional, cultural and social effects on decisions made by economic actors.

Behavioral economics emerged in the 20th century along with advances from the fields of psychology and neuroscience. Through his book The Economic Approach to Human Behavior in 1976, economist Gary S. Becker describes rational choice theory. The theory tells you that economic actors have stable preferences and seek to maximize behavior. He uses an economic approach to understand all human behavior including those related to social interactions, crime and punishment and irrational behavior. Some of the leading contributors to the study of behavioral economics are Herbert Simon, Daniel Kahneman, George Akerlof, Robert J. Shiller, and Richard Thaler.

The importance of behavioral economics

Behavioral economics is a relatively modern economic theory. It is important to understand economic behavior and understand the reasons why economic actors perform certain actions. Then, behavioral economists use social, moral, and psychological factors to study them.

In textbooks in general, economic actors are assumed to be rational. Individuals seek to maximize satisfaction when consuming goods and services. And, …

What are the effects of industrialization? positive and negative impacts

Industrialization brings both positive and negative effects. During industrialization, the manufacturing sector enjoyed a rapid increase in output. It also creates more jobs and income in the economy as it increases the value added of primary sector output. However, industrialization has also resulted in more population, urbanization, and pressure on social and environmental problems.

Positive effects of industrialization

Goods available in abundance and variety

The goods available are more abundant and more diverse. Industrialization allows us to have more things to buy at affordable prices. Manufacturing increased its production significantly. Machines help workers be more productive, producing more goods than ever before. Thus, prices can fall as output increases on a large scale.

On the other hand, we can also enjoy more diverse goods. Various manufacturing businesses developed during industrialization. Research and development gives rise to new innovations, not only related to the production process but also to products.

More job opportunities

Industrialization spurred various businesses to develop. When the demand for manufacturing inputs increased significantly, various businesses in the primary sector sprang up. If previously relying on small-scale businesses, large companies have started working on the primary sector. An example is an agribusiness company, which has a supply chain …

Types of Capital in Economics and Business

There are several types of capital in economics and business. Some contribute directly and are used to produce goods and services. Meanwhile, others contribute indirectly. And, here, we discuss four of them:

Physical capital

Physical capital or capital goods are man-made tools – such as machines and equipment – ​​that are used to produce goods and services. That is what “capital” means in the economist’s definition when describing factors of production or economic resources. It is one of four economic resources besides land, labor and entrepreneurship.

Physical capital is vital because it provides economic benefits to businesses. It contributes directly, which companies use to assist and support the production of goods or the provision of services. For example, manufacturing companies use machines to process raw materials into intermediate or final goods.

If the accumulated physical capital increases, we expect the firm to produce more output. Improved quality also contributes to increased output, for example by adopting more sophisticated technology. So companies can increase production by investing in more capital or better quality technology.

Furthermore, the company reports fixed capital as fixed assets. In financial statements, you may know it as property, plant and equipment (PP&E). Businesses often spend a lot …

Challenges entrepreneurs face in new small businesses

The challenges entrepreneurs face can vary widely. It depends on what business they are going to run and how much resources they have. Identifying and coming up with a viable business idea is an entrepreneur’s first challenge. Other challenges could be related to how they choose the right location, raise capital, manage operations and business finances.

In general, challenges also vary over the life span of a business. The challenges faced when starting a business can be different when growing a business. And, this article will focus on the challenges entrepreneurs face when starting a new small business.

Identify viable business opportunities

Screening and selecting viable business ideas is an important part before starting a business. It can determine future success.

Entrepreneurs often find various business ideas from their daily problems. There may be many available. However, not all of them are worth running.

For example, entrepreneurs find business ideas from their hobbies, skills or personal experiences. Another source is from previous work experience. Small-budget research and attending franchise fairs can also be potential sources for business ideas. In fact, some entrepreneurs may come across the idea by chance.

Although there are many business ideas and market opportunities, not all …

Solutions to Avoid Business Failure

Solutions to avoid business failure can vary widely. There are countless businesses around us with different backgrounds, including different target markets and resources. For this reason, the types of risks and solutions to deal with them can also vary widely.

To be sure, no entrepreneur starts a business to fail. They try their best to start, operate and grow the business. Sometimes they are successful. But, at other times, they failed. And failure does not discourage them from starting another business.

Business failures don’t just occur due to internal factors, such as poor management and cash flow problems. But, it was also due to external factors. For example, more established companies pursue aggressive strategies, which ultimately kill smaller businesses with limited resources.

Likewise, when the recession hits, many businesses go bankrupt. That’s not just the case for small and young businesses, but also for large, established companies.

How can we mitigate failure? First, we identify the source of the risk, what are the possible causes of failure. Second, we sort them from the most strategic to the least strategic, which ones have a significant impact and are most likely to occur. Third, we prepare anticipatory steps before the problem actually …

Where Do Business Ideas Come From?

Business ideas emerge from everyday life. For example, they commercialize their hobby. Or, they observe the problems people face and then offer products to provide them with solutions.

Basically, business ideas are plentiful and it’s not hard to find them. However, not all of them deserve to be commercialized. So, the real difficulty when starting a business is finding a viable business idea.

How to judge an idea is feasible or not? Beginning entrepreneurs may have to spend some time trying to find answers.

On the other hand, mature entrepreneurs can be one step ahead of ordinary people or beginners. They have a kind of sense when it comes to a business idea. They can quickly determine whether the business idea is feasible or not.

How do business ideas arise?

There are many entrepreneurs around us. So, there are many ways to capture brilliant business ideas. The question is, where do entrepreneurs’ business ideas come from? How did they find it?

In general, entrepreneurs’ business ideas come from their daily lives. It could be intentional or coincidental.

Then, how entrepreneurs offer solutions, there are two types of entrepreneurs. Some entrepreneurs come up with ideas and offer completely new solutions. Others …

How Businesses Build Competitive Strategies

Building a competitive strategy is about how companies outperform their competitors in generating profits by satisfying the same consumer needs and wants.

There are many businesses around us. Some target the same market. They compete directly in satisfying consumer needs and wants. And, their products replace each other. So, when consumers do not like the product of a company, they will switch to a competitor’s product.

Now, let’s say, you are running a business.

Being successful in the market requires an effective competitive strategy to win the competition. When successful, your company generates above-average profitability by gaining a competitive advantage.

However, due to dynamic competition and market demand, competitive advantage may last only temporary. Competitors may develop superior competitive strategies and eventually outperform your company.

For this reason, your company should adapt the strategy. Thus, it remains relevant and effective in dealing with the changing business environment. And, if your company is able to maintain a superior position over time, that is what we call sustainable competitive advantage.

How does your business successfully compete and gain a competitive advantage? Michael Porter provides a basic framework, known as generic strategy. It tells us how companies compete, in what dimensions.

Then, your …

How Does Business Work

The way a business works is basically adding value. They do this by processing inputs into higher-value outputs. Assume, the business produces goods and you are the owner.

Starting a business

At first, you decide what to produce. You then organize and make decisions about resources, including how to pool and organize them. Some you may have to buy such as raw materials. Others you may be able to rent such as machinery and buildings. To do it all, you need capital.

Your initial capital may come from your personal pocket or contributions from your family or friends. Or, you apply for a loan or raise funds from other external sources such as crowdfunding. For external sources, you should create a business plan as a way to convince fund providers to be willing to put their money into your business.

You also design how the business operates. For example, you have to determine what business structure you run, whether it is a sole proprietorship, partnership or limited company. You also organize operational activities into various business functions such as human resources, operations, marketing and finance.

Operating a business

Once operational, your business converts inputs into outputs. We call this transformation …