1.

2 The factors of production

1.2.1 The Factors & Their Rewards
The Factors of Production
Factors of production are the resources used to produce goods & services

Land, labour, capital & enterprise

The production of any good/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

The Four Factors of Production

Land Labour Capital Enterprise

The human
input into the
Non man-
production process.
made natural Enterprise
Labour involves
resources are involves taking risks in
mental or physical
available for Capital is any man- setting up or running a
effort. Not all labour
production. Some made resource that firm. An entrepreneur
is of the same
countries have a is used to produce decides on the
quality. It can
vast amount of a goods/services e.g. combination of
be skilled or
particular natural tools, buildings, the factors of
unskilled. Some
resource & so are machines & production necessary to
workers are more
able to specialise in computers produce goods/services
productive than
its production e.g. with the aim of generating
others because of
oil, wood, fish, corn, profit
the education,
iron ore
training & experience
they have

Some of the Factors of Production Required to Produce a Motor Car

1.2 The factors of production 1

 Land Labour Capital Enterprise

robotic arms
conveyor belt
iron ore
car designer rolled steel
rubber
production director computers
oil CEO
production line staff seats
sand
supply chain staff dashboards
cows
mirrors
leather

Rewards for the Factors of Production

In a market economic system, the factors of production are privately owned by
households or firms (The terms 'market' & 'free market' are used interchangeably)

They make these resources available to firms who use them to produce
goods/services

Firms purchase land, labour, & capital from households in factor markets

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

The factor income for land → rent

The factor income for labour → wages

The factor income for capital → interest

The factor income for entrepreneurship → profit

1.2.2 Mobility of the Factors of Production

The mobility of the factors of production refers to how easily firms
can switch between different factors of production during the production
process

The more mobile the factors, the more flexibility there will be in production

E.g. if a firm can produce both cars & trucks on its production line &
switching from one to the other only requires a few simple changes to some
robotic arm extensions, then its capital is very mobile

1.2 The factors of production 2

 This means that the firm can be very responsive to changes in
demand for cars & trucks & is likely to make more profit

Labour is often one of the most expensive costs of production

If firms can substitute capital (machinery) for labour, productivity often

increases & costs decrease

Many firms rely heavily on labour & ensuring labour mobility helps to lower
unemployment & reduce worker shortages in an economy

Two Factors That Cause Labour To Be Less Mobile

Geographical Immobility of Labour Occupational Immobility of Labour

- This refers to the ability of a worker

to change occupations when they
- This occurs when workers find it difficult to move lose a job
from one geographical area to another in order to - If their
secure employment skill base is transferable between
- different occupations, then their
Barriers to mobility may include family ties, lack of occupational mobility is high
information about possible jobs in different parts of - In reality, many workers are not able
the country, & the challenges in securing/affording to easily transfer between occupations
accommodation in an unknown location & this is a particular issue when an
economy is faced with
structural unemployment

1.2.3 Quantity & Quality of the Various

Factors
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

1.2 The factors of production 3

 Influences On The Quality Or Quantity Of Factors Of Production Available To
An Economy

Influence Explanation

These can often improve the quality of the factors of production

Technological advances
e.g. development of metal alloys

Changes in the costs of factors of production (for example,

Changes in the costs of higher energy costs caused by the war in the Ukraine) reduce
production the output of a nation as the input prices are now more
expensive

Process innovation often results in productivity

Changes in
improvement e.g. moving from labour intensive car production
relative productivity
to automated car production

Changes in education
Over time this increases the quality of labour in an economy
and skills

These can improve the quantity of the factors of production.

Changes in government
e.g. deregulation of fracking (extracting oil from shale deposits)
regulations
in the USA increased useable oil reserves

Demographic changes A positive net birth rate or positive net migration rate will
and migration increase the quantity of labour available

Preventing monopoly power results in more firms supplying

Competition policy goods/services in an economy and this increases the potential
output of an economy

1.2 The factors of production 4