The factors of production and their rewards
Land (all natural resources) earns rent. Labour (human effort, physical and mental) earns wages. Capital (man-made resources used to produce further goods, like machinery and tools) earns interest. Entrepreneurship (organizing the other three factors and bearing business risk) earns profit.
Division of labour
Dividing a production process into smaller, specialized tasks -- with each worker focusing on one part -- generally increases total output, because workers become faster and more skilled at their specific task, and less time is lost switching between different jobs.
Example 1: Explain one advantage and one disadvantage of division of labour in a factory producing shoes.
Advantage: workers become highly skilled and efficient at their specific narrow task (e.g. only stitching soles), increasing overall output speed. Disadvantage: the repetitive, narrow nature of the work can make jobs monotonous and less satisfying, and workers become dependent on every other stage of the process running smoothly.
The law of diminishing returns
If more units of one variable factor (say, labour) are added to a fixed amount of another factor (say, land or machinery), output initially rises, but eventually each additional unit of the variable factor adds less extra output than the one before it.
Example 2: A farmer keeps adding more workers to a fixed-size plot of land. Explain why output per additional worker eventually starts to fall.
As more and more workers are added to the same fixed land area, each new worker has less land and fewer tools to work with than the ones before, so their individual contribution to total output shrinks -- this is the law of diminishing returns in action.