Factors of production
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Key Terms
Factors of production- the economic resources of land, labour, capital and enterprise
Land- includes all natural and physical resources
Labour- human e ort used in production of goods
Capital (goods)- human made goods used in production
Consumer (goods)- goods and services purchased by households for own satisfaction
Enterprise- risk bearing and key decision making in a business
Occupationally mobile- capable of changing use.
Geographically immobile- incapable of moving from one location to another location.
Mobility of labour- the ability of labour to change where it works or in which occupation.
Mobility of capital- the ability to change where capital is used or in which occupation
Mobility of enterprise: the ability to change where enterprise is used or in which occupation.
Entrepreneur: a person who bears the risks and makes the key decisions in a business.
Labour force: people in work and those actively seeking work.
Productivity: the output per factor of production in an hour.
Labour productivity: output per worker hour.
Output: goods and services produced by the factors of production.
Investment: spending on capital goods.
Gross investment: total spending on capital goods.
Depreciation (capital consumption): the value of capital goods that have worn out or become
obsolete.
Net investment: gross investment minus depreciation.
Negative net investment: a reduction in the number of capital goods caused by some obsolete
and worn out capital goods not being replaced.
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The importance of factors of production
• Increased quality and quantity of production increases living standards
• There are 4 factors of production
- Land
- Labour
- Capital
- Enterprise
Land
• Includes the earth where crops are grown, o ces and factories are built
• Covers every natural resource used in production
Labour
• Covers all human e ort
• Includes mental and physical e ort
• Also referred to as human capital
• More labour means higher capability of production
Capital
• Human made manufactured good used to produce other goods and services
• Capital goods aren’t wanted for personal use
• Consumer goods such as food and entertainment are consumed for personal satisfaction
• Classifying a good into capital and consumer depend on the purpose of its use
Enterprise
• Willingness and ability to bear uncertain risks and make decisions
• Organise FOP
• Bear risk of losing money
• In large businesses shareholders risk losing money
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• And managing director takes production decisions
Mobility of Land
• Most land is occupationally mobile
• Can be used for number of purposes
• Geographically immobile since you can’t move a piece of land from x to y
Mobility of Labour
• Mobility of labour varies
• Some labour may be geographically immobile because-
- Di erences in price and availability of housing in a country
- Family
- Di erences in education system
- Lack of information
- Restrictions on movement of workers
• Similar causes for occupational mobility
Mobility of Capital
• Varies according to the type of good
• Some goods can be transferred from x to y but some goods like a mine can’t
• A van can be used by any business making it occupationally mobile but a printer only prints
Mobility of Enterprise
• Depends of mobility of entrepreneurs
• Most mobile FOP
• Skills of an entrepreneur can be applied in every industry
• Also geo mobile since of you can set up one successful business you can probably set up
another one
Quantity of land
• Doesn’t change much with time
• Soil erosion can reduce supply of land
• Renewable resources can be used again and again
• Non renewable sources are over exploited and can’t be replenished quickly
Quality of land
• Fertilisers make land more fertile
• Purity and health of sh and rivers can ne improved by reducing pollution
Quantity of labour
• In uenced by 2 key factors
- Number of workers available
- Hours workers work
Number of available workers
• Size of population
• Age structure of population
• Retirement age
• School leaving age
• Attitude to working women
Number of hours workers work
• Length of average working day
• Full time or part time
• Duration of overtime
• Length of holidays taken
Quality of labour
• Better education
• Better training
• More experience
• Better healthcare
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Quantity of capital
• In uenced by investment
• Tends to increase over time
Quality of capital
• Advances in technology enable capital to produce better quality products
Quantity of enterprise
• Increase if there are more entrepreneurs
• Good education system may help develop more entrepreneurs
• Lower corporate taxes may encourage more people to set up their business
Quality of enterprise
• If people receive better education
• Better healthcare
• More experience
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