I've learned that the factors of production are Labor, Land, Capital and Entrepreneurship. I've also learned that households, or units of people living under one roof, supply these resources.

But I'm confused because I can only understand how a household can provide Labor and Entrepreneurship. When does a firm ever pay rent to a household for the use of land? Don't they pay other firms?

Doesn't capital usually come from other firms as well? If a publishing company invests in computers, they get them from Microsoft--not any household, right?


1 Answer 1


While it’s true that firms can pay other firms for land or capital (and in fact firms can pay another firms for entrepreneurship - you can hire consulting firms, and there are also firms that ‘borrow’ workers to other firms). All firms are in the end owned by some household.

Even if legally you can have both physical and legal persons (i.e. limited company for example) in the end any company has to be owned by household. A building or a machine cannot own property. In the end after some chain of legal ownership there must be some physical person (i.e. household) that owns those companies.

From economic perspective it does not really matter how long the paper chain between company and some household is, only thing that matters is that it exists. Hence in the end it always must be some household providing that capital or land (by providing equity to the firms).

This is really just obscured in modern world and hidden under all the legal arrangements but in the end there can be no company that is just owned by itself there must be some household behind it. If you own a plot of land and decide to build factory on it you are supplying that land to your firm where you are the household and as a result your compensation (profit you will get from operating the company) will include the rent from land as well as return on capital you supply that firm. If you put your own entrepreneurship or labor profit will include that as well.

  • 1
    $\begingroup$ AHA! This is the key insight that I've been missing. I sure it would inform my earlier question that you also answered. $\endgroup$ Commented Sep 10, 2020 at 19:21

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.