IGCSE Economics

Unit 2 Factors of Production

Aim
To understand what is land, labor, capital & enterprise.
Analyze the influences on the mobility of factors of
production.
The importance of factors of
production
2.1
Factors of Production

The economic resources of land, labor, capital, and

enterprise.

People are living longer because healthcare, education,

housing, sanitation, and nutrition have improved. This, in
turn, is because of increases in the quantity and quality of
factors of production. Factors of production is another term
for economic resources.
 Four Factors of Production

Most economists identify four factors of production:

• land
• labor
• capital
• enterprise
Land

Land in general terms includes the earth in which crops are

grown, and on which offices and factories are built, but in
economics, it has a wider meaning. It covers any natural
resource which is used in production.
Labour

Labour covers all human effort. This includes both the mental
and the physical effort, involved in producing goods and
services. A road sweeper, a steel worker, and a bank
manager all contribute their labour.
Capital
Capital would have to be used in the diversion of the course
of a river. Capital is any human-made (manufactured) good
used to produce other goods and services. It includes, for
example, offices, factories, machinery, railways, and tools.

Capital is also referred to as capital goods and producer

goods. Economists distinguish between capital and
consumer goods. Capital goods are not wanted for their
own sake, but for what they can produce. In contrast
consumer goods, such as food, clothing, and entertainment,
are wanted for the satisfaction they provide to their owners.
Enterprise
Enterprise is the willingness and ability to bear uncertain risks
and to make decisions in a business. Entrepreneurs are the
people who organize the other factors of production and who
crucially bear the risk of losing their money if their business
fails. Entrepreneurs
decide what to produce by taking into account consumer
demand and how to produce it.
Mobility of the factors of
production
2.2
The Mobility of Land
Most land is occupationally mobile. This means that it can
be used for a number of purposes. Land which is currently
being used for farming may be used instead to build houses.
Trees can be used to make tables or sleepers for railway
lines.

Land, in its traditional sense, is geographically immobile. It

is not possible to move a section of land from Sri Lanka to
India, for example. Some forms of land, in its wider meaning,
can be moved to a certain extent. For example, the course of
rivers can be diverted and wildlife can be moved.
 The Mobility of Labour
The ability of labour to change where it works or in which
occupation.
The mobility of labour varies. Some workers may find it difficult to
move from one area of the country to another, or from one country
to another (geographical immobility), and some may find it difficult
to switch from one type of job to another type (occupational
immobility). 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.
The Mobility of Capital
The ability to change where capital is used or in which
occupation.

The geographical and occupational mobility of capital varies

according to the type of capital goods. Some types of capital
goods can be transferred from one part of the country to
another.
The Mobility of Enterprise
The ability to change where the enterprise is used or in
which occupation.

Enterprise moves when the people who carry out the

functions move. These people are called entrepreneurs. The
mobility of an enterprise depends on the mobility of
entrepreneurs.

Enterprise is the most mobile factor of production. The skills

involved in being an entrepreneur can be applied in every
industry.
Quantity and quality of the
factors of production
2.3
 The Quantity of Land
The amount of physical land in existence does not change
much with time. There is a certain degree of soil erosion
which reduces the supply of agricultural land, but also a
certain amount of land reclamation which increases its
supply.

Natural resources are:

Renewable they are replaced by nature (e.g. wind power)
Non-renewable they are reduced by use (e.g. gold and oil)

There is a risk that renewable resources can be turned into non-

renewable resources if they are over-exploited.
The Quality of Land
There are a number of reasons why the quality of natural
resources may increase. Fertilisers can be applied to fields to
increase the fertility of the land. The purity of rivers, and so
the health of fish in the rivers, can be improved by stopping
firms polluting the rivers. Providing good drainage can
increase the yield from fruit trees.
 The Quantity of Labour
The quantity of labour is influenced by two key factors. One is the
number of workers available and the second is the number of hours
for which they work.
The number of available workers is determined by:
• The size of the population.
• The age structure of the population.
• The retirement age.
• The school leaving age.
• Attitude to working women.

Those people who are working and those seeking work form the
labour force. This is also known as the workforce or working
population. Those of working age are people between the school
leaving age and the retirement age.
 The Quantity of Labour
The number of hours which people work is influenced by
(among other factors):
• The length of the average working day, for example, full-time
workers in the USA tend to work for longer hours than those
in European Union countries
• Whether they work full or part-time, for example, more
people in the UK work part-time than those in France
• The duration of overtime
• The length of holidays taken by workers
• The amount of time lost through sickness and illness.
More can be produced with the same number of workers if
the workers become more skilled. An increase in
productivity, including labour productivity, is a major
cause of an increase in a country’s output.
The Quality of Labour
The quality of labour can be improved as a result of better
education, better training, more experience and better
healthcare. A better educated, better trained and more
experienced labour force will be able to carry out more
difficult tasks, work with more complex machinery
and equipment, and produce more and better quality
products. A healthier labour force will be able to concentrate
more, be stronger for any manual tasks and will have fewer
days off sick.
The Quantity of Capital
The quantity of capital is influenced by investment and tends to
increase with time.

The total value of the output of capital goods produced is referred

to as a gross investment. Some of the capital goods being
produced will be replacing those which have worn out or become
obsolete. The value of replacement capital is called depreciation
or capital consumption.

Net investment is the value of the extra capital goods made. It is

equal to gross investment minus depreciation.

Occasionally, the gross investment may be lower than depreciation.

This means that some of the capital goods taken out of use are not
replaced. This is said to be a negative net investment.
The Quality of Capital
Advances in technology enable capital goods to produce
higher output and better quality output. The development of
robotics in car production, for example, has increased
significantly the number of cars that a car factory can
produce.
The Quantity of Enterprise
The quantity of enterprises will increase if there are more
entrepreneurs. A good education system, including university
degree courses in economics and business studies, may
help to develop entrepreneurs in an economy. Lower taxes
on firms’ profits (corporate taxes) and a reduction in
government regulations may encourage more people to set
up their own businesses.
 The Quality of Enterprise
The quality of enterprise can be improved if entrepreneurs
receive better education, better training, better healthcare, and
gain more experience. More experience can be particularly
significant in the case of entrepreneurs. Very successful
entrepreneurs have often set up businesses in the past, some
of which may have failed. The knowledge and understanding
they have gained of, for example, the products people like to
buy and the best sources of raw materials can help them make
a success of a new business.
Payments for factors of
production
2.4
Payments for Factors of
Production
Payments are made for the use of factors of production.

 Labour – firms pay wages for the services of the

workers.
 Enterprise – for bearing uncertain risks and organizing
the other factors of production entrepreneurs earn
profit.
 Land – receives rent.
 Capital – interest is a payment for capital