Four factors to determine a fair use
The four factors outlined in the language of the statute are the tests you use to guide and justify the use of copyrighted material without permission or license. These four factors need to be weighed against each other; they are not mutally exclusive.
For example, some uses in educational settings (a factor that supports Fair Use) might have a deliterious effect on the owner's right to exploit their content in the market (as could be the case in which PDF articles are repeatedly posted for download instead of using copyright-cleared course readers), and that negative effect could be determined to outweigh the educational setting and perhaps cause the underlying use to be deemed unfair. The elaborations used in the discussion below come from the case law history of Fair Use decisions.
(1) Purpose and character of the use
Uses in support of activities that are listed in the statute's preamble (research, teaching, criticism, news reporting, etc) aid a Fair Use defense. Some commercial uses can be Fair and some uses in an educational setting can be unfair. "Transformative" uses, though rare in instructional settings, change the work into something new and are also more likely to be supported by Fair Use.
(2) Nature of the copyrighted work
Here, the test focuses on the work being used rather than just the use itself. Generally, use of published works support Fair Use defenses, as do uses of factual or non-fiction based works. Using unpublished fiction, for example, is harder to defend via Fair Use, though specific uses of published fiction (or other creative work) can readily be defended through Fair Use.
(3) Amount and substantiality of the portion used in relation to the copyrighted work as a whole
A use which relies on excerpts of a complete work will have a stronger Fair Use case than the use of entire works. At the same time, it could be the case that the excerpt is central-enough to the work (i.e., "heart of the work") that the use would not be supported by the other factors and would therefore not be a Fair Use. On the other hand, use of complete images (think about Google's thumbnails) could be supported by Fair Use if the other three factors weighed in favor of the use.
(4) The effect of the use upon the potential market for or value of the copyrighted work
Here, the court will investigate the effect the use has on the market for the original work as well as the potential market for the work. Is the use intended to substitute for a market currently enjoyed by the work's owner? Is the use coming from an unlawfully acquired copy? Is there affordable and ready licensing for the use? Are numerous copies being made and distributed? Is the work being used repeatedly and long-term?
Next: Checklists for Fair Use