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Chapter 2 - Factors of Production

The document defines and describes the four factors of production - land, labor, capital, and enterprise. It explains that land includes natural resources and physical space. Labor refers to all human effort, including skills and experience. Capital consists of manufactured goods used to produce other goods and services. Enterprise involves taking on business risks and making decisions. The document also discusses how the quantity and quality of each factor can change over time and their varying degrees of mobility.

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790 views4 pages

Chapter 2 - Factors of Production

The document defines and describes the four factors of production - land, labor, capital, and enterprise. It explains that land includes natural resources and physical space. Labor refers to all human effort, including skills and experience. Capital consists of manufactured goods used to produce other goods and services. Enterprise involves taking on business risks and making decisions. The document also discusses how the quantity and quality of each factor can change over time and their varying degrees of mobility.

Uploaded by

Iceblue
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 2: Factors of Production

Key Points:
 There are four Factors of production – Land, Labour, Capital and enterprise.
 There are key resources that are required to produce goods and services in any
type of economy.
 The factors of production vary in terms of their mobility.
 Changes in the quantity and quality of factors of production lead to changes on
the ways in which goods and services are produced.

Main Points:

 Land
o Land is any natural resource which is used in production 
o It includes what is beneath the land, such as coal, what occurs
naturally, e.g., rainforests, seas oceans and rivers and what is found in
them 
 Supply of Land
o The amount of physical land in existence does not change much with
time
o There is a certain degree of soil erosion which reduced the supply of
arable land, but also a certain amount of land reclamation which
increases its supply
 Mobility of Land
o Most land is known as being occupationally mobile
o It can be used for a number of purposes for example, land currently
being used for farming may instead be used to build houses or trees
can be used to make table
Chapter 2: Factors of Production

 Capital
o Capital is any human-made good used to produce other goods
and services e.g., offices, factories, machinery, railways and tools. 
o Capital is also referred to as capital goods and producer goods
o Economists distinguish between these two
 Capital goods are not wanted for their own sake, but for
what they can produce.
 Consumer goods, such as food, clothing and entertainment,
are wanted for the satisfaction they provide to their owners.
 Supply of Capitol
o The supply of capital tends to increase with time 
o Every year some capital goods physically wear out and some
become outdated (obsolete)
o The total value of the output of capital goods produced is referred
to as gross investment 
o The value of replacement capital is called depreciation or capital
consumption
o Net investment is the value of the extra capital goods made:
 It is equal to gross investment - depreciation 
Chapter 2: Factors of Production

 Labour
o labour covered all human effort – both mental and physical,
involved in producing goods and services 
o This is sometimes referred to as human capital, with reference to
the education, training and experience that workers have gained 
o The more human capital workers have the more they should be
capable for producing 
 Supply of Labour
o This is influenced by the number of workers and number of hours
for which they work
o The number of available workers is determined by:
 The size of the population
 The age structure of the population
 The retirement ages
 The school leaving age
 Attitude to working women
o As with factors of production, it is not just the quantity of labour,
which is important, but also the quality.
o More can be produced with the same number of workers if the
workers become more skilled. 
o Increase in productivity is a major cause of an increase in a
country’s output 
 Mobility of Labour
o Some workers may find it difficult to move from one area of the
country to another or from one country to another (geographical
immobility)
o Some may find it difficult to switch from one type of job to
another (occupational immobility)
o The causes of geographical immobility include:
 Differences in the price and availability of housing in
different areas and countries
 Family ties
 Differences in educational systems in different areas and
countries 
 Lack of information
 Restrictions on the movement of workers
o Occupational immobility can be as a result of lack of information
about vacancies in other types of jobs but is mainly due to lack of
appropriate skills and qualifications. 

 Enterprise
Chapter 2: Factors of Production

o Enterprise is the willingness and ability to bear uncertain risks and to


make decisions in a business
o Entrepreneurs are the people who organise the other factors of
production and who crucially bear the risk of losing their money, if
their business fails 
o Some of the risks faced by any business can be insured against, such as
fire, flood and theft 
o Other risks have to be borne by the entrepreneur, as they cannot be
anticipated, based on past events, so cannot be insured against
 Supply of Enterprise
o A good education system, especially higher education may help to
develop entrepreneurs in an economy
o Lower taxes on firms’ profits (corporate taxes) and a reduction in
government regulations may encourage more people to set up their
own businesses
 Mobility of Enterprise
o Enterprise is the most mobile factor of production 
o The skill involved can be applied in every industry
o Apart from being occupationally mobile, enterprise is also
geographically mobile
o Someone who has been successful in starting up and running a
business in one country is likely to be successful in another country
also

Exam Questions:

1. Give an example of each factor of production for a food stall trader in a


local market.
2. Why might an agricultural worker be occupationally and geographically
immobile?

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