Chapter 2

Factors of Production
▪ …………………………………………………………………………………………………………………………………….
▪ Production resources can be mainly divided in to four & they are as follows:
✓ ……………………………………………………………………………
✓ ……………………………………………………………………………
✓ ……………………………………………………………………………
✓ ……………………………………………………………………………

▪ The production of any good or service requires the use of a combination of all four
factors of production.

• Goods are physical objects that can be touched (tangible) e.g. mobile phone

• Services are actions or activities that one person performs for

another (intangible). e.g. manicure, car wash

I. LAND
…………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………
(Things that occur in nature without any human intervention.)
Example:
• On the earth - Geographical location, soil, forestry, rivers and streams,
ocean, fishery etc.
• Above the earth - Space, atmosphere, weather, climate, sunlight,
• Below the earth - Natural gas, mineral resources

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 II. LABOUR
▪ ……………………………………………………………………………………………………………………………………….
(The human input into the production process)
▪ Not all labour is of the same quality.
▪ It can be skilled or unskilled.

Human Capital

▪ ………………………………………………………………………………………………………………………………………..
▪ The more human capital workers have, the more goods and services they should be
able to produce.

III. CAPITAL
▪ ……………………………………………………………………………………………………………………………………….

Capital is a real concept.

✓ The concept of capital uses only to define real production resources

([Link], tools, factory) in economics but not to define financial resources.

✓ Financial resources (Money, saving deposits etc.) are neither economic goods nor
production resources since it cannot be used as an input to produce goods and
services. But financial resources can be used to acquire real capital.

IV. ENTERPRISE
▪ ……………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………..

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 Entrepreneur
An entrepreneur decides on the combination of the factors of production necessary to
produce goods and services with the aim of generating profit.

Functions of an entrepreneur
a. ………………………………………………………………………………………………………………………………

Risks

Insurable Risks Uninsurable Risks

Risks that can be covered Risks that cannot be covered by
by insurance policies. insurance and must be accepted
E.g.: fire, flood, theft. by the entrepreneur.

E.g.:

Rival firms bringing out competing

products.

Rising costs of production.

Business Failure

b. ……………………………………………………………………………………………………………………………………
c. ……………………………………………………………………………………………………………………………………
d. ……………………………………………………………………………………………………………………………………
e. …………………………………………………………………………………………………………………………………….

The two key tasks of an entrepreneur are:

1. Bearing financial risk
2. Making production decisions and organising factors of production
In large companies, these two tasks are carried out by different people:
a. Shareholders bear the risk of losing money if the company fails.

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 b. Managing director makes production decisions and organises the factors of production.

Rewards for the factors of production

Factor Incomes/Factor Earnings

➢ The payments made for the use of the factors.

➢ In a market economic system, the factors of production are privately owned by households
or firms (the terms 'market' and 'free market' are used interchangeably)
• They make these resources available to firms that use them to produce goods and
services
• Firms purchase land, labour and capital from households in factor markets.

➢ Households receive the following financial rewards for selling their factors of
production. This reward is called factor income.

Rewards/ payments for the factors of production

Factors of Production
Factor Incomes/Factor Earnings
Land
Labour
Capital
Entrepreneurship

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 Causes of changes in the quantity and quality of factors of production

If the quantity or quality of a country's factors of production change, then the productive
potential of the country also changes.

▪ If the quantity or quality increases, this corresponds to an outward shift of the potential
output of an economy, as shown on a production possibilities curve model The country is
able to produce more.
▪ If the quantity or quality decreases, this corresponds to an inward shift of the potential
output of an economy, as shown on a production possibilities curve model. The country now
cannot produce as much as it used to.

I. Causes of Changes in the Quantity and Quality of Land

▪ The quantity of land can be increased through land reclamation.
e.g.: Countries such as China, Dubai, the Maldives, the Netherlands, and Singapore have
carried out land reclamation for housing, industry, and tourism.
▪ The quantity of land can be decreased due to soil erosion.
e.g.: Soil erosion is caused by activities like deforestation and farming.
Natural resources

Renewable resources Non-renewable resources

(e.g., gold and oil), which
(e.g., wind power), which are
are reduced by use and
naturally replaced and can be
cannot be replaced.
used again and again.

▪ Renewable resources may become non-renewable if they are overexploited. For example,
overfishing can deplete fish stocks, and hunting wildlife can reduce populations to the point
where they cannot recover.

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 The Quality of Land
The quality of natural resources can be improved in several ways.
▪ Fertilisers can be used to increase the fertility of the soil.
▪ The purity of rivers can be improved by reducing or stopping pollution, which also
helps maintain the health of fish.
▪ Good drainage systems can increase the yield from fruit trees and improve
agricultural productivity.

II. Causes of Changes in the Quantity and Quality of Labour

The quantity of labour
The quantity of labour is influenced by two key factors:
1. …………………………………………………………………………………..
2. …………………………………………………………………………………..

1. The number of workers available is influenced by:

➢ ………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………….
➢ ………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………….
➢ ………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………….
➢ ………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………….
➢ ………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………….
Not everyone of working age is in the labour force. Some may be in full-time education or
unable to work due to disability.

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 2. The number of hours worked is influenced by a number of factors:

➢ …………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………
➢ …………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………
➢ …………………………………………………………………………………………………………………………………………
➢ …………………………………………………………………………………………………………………………………………
➢ …………………………………………………………………………………………………………………………………………

The Quality of Labour

▪ Productivity and output depend not only on the quantity of labour but also on its quality.
▪ Labour productivity is a key factor in increasing a country’s total output.

▪ The quality of labour can be improved through:

➢ …………………………………………………………………………………………………………….............
➢ …………………………………………………………………………………………………………….............
➢ …………………………………………………………………………………………………………….............
▪ Better-trained workers can:
✓ Perform complex tasks.
✓ Use machinery more effectively.
✓ Produce higher-quality goods and services.
▪ A healthier workforce:
✓ Concentrates better.
✓ Has more physical strength for manual work.

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III. Causes of Changes in the Quantity and Quality of Capital
The Quantity of Capital

▪ The quantity of capital is mainly influenced by investment.

▪ Investment usually increases the amount of capital over time.
▪ However, some capital goods wear out or become outdated and need replacement.
▪ Key terms:
➢ …………………………………………………………………………………………………………….............
➢ …………………………………………………………………………………………………………….............
➢ …………………………………………………………………………………………………………….............

Example:

If a country produces $600 million of capital goods in a year, and depreciation is $80 million,

then Net investment = ............................................................................................

= …………………………………………………………………………………………

The Quality of Capital

▪ …………………………………………………………………………………………………………………………………

▪ Higher-quality capital goods result in:

✓ Increased output.

✓ Better-quality products.

Example:

The use of robotics in car production has greatly increased the number of cars a factory can
produce.

IV. Causes of Changes in the Quantity and Quality of Enterprise

The Quantity of Enterprise

The number of entrepreneurs can increase due to:

✓ Better education systems (e.g., university courses in economics and business studies).

✓ Lower taxes on firms’ profits.

✓ Reduced government regulations.

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 ✓ Migration – some migrants start businesses to build a new life.

The Quality of Enterprise

The quality of entrepreneurship can improve through:

✓ Education and training – developing business and management skills.

✓ Healthcare – ensuring entrepreneurs stay healthy and productive.

✓ Experience – learning from practice to make better decisions.

✓ Knowledge of products and raw materials – improving efficiency and competitiveness.