Chapter 3

Factors of
production
LEARNING INTENTIONS

In this chapter you will learn how to:

• define the meaning of the factors of production: land, labour,
capital and enterprise
• explain the importance of the factors of production
• describe the rewards to the factors of production
• explain the difference between human capital and physical
capital
• explain the division of labour and specialisation
• explain the role of the entrepreneur in the organisation of the
factors of production in 21st century economies and as a risk
taker.

ECONOMICS IN CONTEXT

James Dyson, entrepreneur

Figure 3.1: James Dyson

James Dyson is a well-known global entrepreneur. An

entrepreneur is someone who seeks out new business opportunities
and is willing to take risks. Dyson’s range of products such as
vacuum cleaners, fans and hand dryers are used around the world
in homes, hotels, factories, offices and airports.
James Dyson is best known for his bagless vacuum cleaner. As an
engineer, the idea for the cleaner developed from a new industrial
dust extractor that Dyson built for his small engineering company.
By the early 1980s, Dyson had a working prototype of his vacuum
cleaner, but it took a further 10 years for it to go on sale as a
commercial product, and left him heavily in debt.
Launched in 1993, the Dyson bagless vacuum cleaner became a
best seller. Dyson moved production of the vacuum cleaner from
the UK to Malaysia in 2002. At the time, the move was
controversial as it would result in job losses in the UK. Once the
patent expired, other manufacturers copied Dyson’s design.
More recently, Dyson’s company has developed and manufactured
a range of hand dryers, hair dryers, fans and lights using the latest
Dyson technology. His revolutionary washing machine was not
successful.
His latest project has been to build an electric car at a new factory
in Singapore. Despite a huge investment, Dyson has been forced to
abandon the project as it would not be commercially viable. It is
likely there will be other new ventures to follow but this shows the
risks involved even for an experienced and highly successful
entrepreneur.
In 2019, the US business magazine Forbes estimated James
Dyson’s net worth to be over $5 billion.
Discuss in a pair or a group:
• What qualities do you think a successful entrepreneur like
James Dyson is likely to have?
• Why might Dyson have failed?
3.1 The factors of production
The fundamental economic problem of scarcity was explained in
Section 1.1: resources are scarce in relation to wants, which are
unlimited. Scarce resources and unlimited wants result in the need to
make choices.
Economists refer to the resources available in an economy as the factors
of production. Factors of production are the means by which an
economy produces a whole range of goods and services to meet the
needs of its population. The owners of factors of production receive
payments when the factors are used by others.
There are four main types of factors of production, as shown in Figure
3.2.

Figure 3.2: The factors of production

Land
Land is a natural resource. This factor of production includes a wide
range of things such as mineral deposits like oil and coal, the earth’s
rivers and lakes, climate and the land itself, in terms of the soil for
agriculture and trees and vegetation. This factor of production can be
used to describe the natural resources such as sea, sand and sun that are
important for the development of tourism and leisure activities.
The quality as well as the quantity of land as a factor of production is
important. Too much sun, too little rain or poor soil can mean that this
factor of production has little or no productive use. The quality of land
as a factor of production is increasingly relevant in view of climate
change.
The reward for owning land is the rent or income that its owners
receive. In the case of minerals, such as coal or precious metals, this can
be a payment that is made for the minerals after they have been
extracted.

TIP

Some learners struggle to understand the scope of the ‘land’ factor of

production. It is much broader than the physical space on which an
office or factory is built. Remember that it includes oil reserves,
climate, rain forests and other natural resources.

Labour
Labour is the human resources available in any economy.
The quantity and quality of labour is of major importance:
• Some economies, particularly low-income countries, often have
large populations but suffer from a lack of a well-trained and well-
educated labour force. Not all of the population is available for
work. Some people are above or below the normal working age
while others choose not to work for family or social reasons.
• In some economies there are cultural limitations on women
working or the type of work that women are permitted to do.
• Some countries, for example China, Russia and Italy, have
declining populations and rely on immigrant workers (workers
from abroad) to do both skilled and unskilled jobs.
• The quality of labour is essential for economic progress. In India,
emphasis has been given to increasing the IT skills of workers and
has in part resulted in the growing importance of India in the
global economy.
• The reward for labour is the wage or earnings paid for labour’s
services. The payment received depends on the value of labour to
whoever is hiring the labour.

Capital
Capital is a type of physical resource including anything that can be
regarded as made by humans to aid production. Capital covers a wide
range of items such as factories, office blocks, machinery, information
technology, transport vehicles and infrastructure in the form of roads,
railways, pipelines, electricity supplies, water supplies and so on.
Capital is combined with land and labour to produce goods and services
that are required. The quality as well as the quantity of capital is
important, particularly in low-income economies where essential
services may be unreliable.
The reward for using capital is the financial return that is earned or
income if the capital resource is rented.

Enterprise
Enterprise is a form of human capital. As a factor of production,
enterprise has two main functions:
• It organises the other factors of production so as to produce goods
and services.
• It refers to the ability and inventiveness of the entrepreneurs who
are prepared to take risks. Well-known entrepreneurs include:
Richard Branson (Virgin Group), Jeff Bezos (Amazon), Cher Wang
(HTC Corporation), Jack Ma (Alibaba), Folorunsho Alakija (Rose
of Sharon Group), Mukesh Ambani (Reliance Industries), Indra
Nooyi (PepsiCo) and Bill Gates (joint founder, Microsoft). More
typical though are the millions of people who own small
businesses and organise the factors of production in order to make
a profit. This is the reward for enterprise.

ACTIVITY 3.1

Think about where you live. Make a list of examples of each of the
factors of production in your area.
Once you have completed the activity, share your list with another
learner. Have you got the same examples?
In a group, discuss how relevant the factors are to the local
economy.

TIP

It is often overlooked that the quality of a factor of production is

often more important than the quantity. Remember this point when
writing about labour and capital as factors of production.
3.2 The difference between human capital
and physical capital
As a factor of production, ‘capital’ can be more correctly described as
physical capital.
It is the result of more resources being made by businesses and
government in the wide range of items such as factories, machinery and
infrastructure referred to earlier. The quality as well as the quantity of
physical capital is often considered to be the most important source of
economic growth in low-income and lower middle-income countries.
The importance of the quality of labour as a factor of production has
been referred to earlier. Building on this idea, economists often refer to
human capital. This is the value of labour in contributing to the
productive potential or future growth in an economy. Human capital can
apply to individuals as well as to the population as a whole. It covers
the skills, knowledge and experience of labour that is being used to
produce goods and services. These skills may affect the future earnings
of individuals and of the economy. Therefore, human capital can be
seen as an investment by individuals, employers and the government to
increase the future rate of economic growth.
3.3 Specialisation and the division of labour
One of the ways in which more goods and services can be produced in
the economy is through the process of specialisation.
Specialisation refers to a situation where individuals and firms, regions
and entire economies concentrate on producing some goods and
services rather than others. For example, at the individual level, within
the household there may be some specialisation in the performance of
household tasks, with one person doing the ironing and gardening while
another does the shopping and cooking. In the workplace, of course, the
fact that some people are labourers or lorry drivers while others have
office jobs or are economics teachers is a reflection of specialisation. At
this level, specialisation allows individuals to concentrate upon what
they are best at doing, meaning more goods and services will be
produced.
However, with specialisation, although more is produced, no one is self-
sufficient (able to produce everything they need). It becomes necessary
to exchange or trade goods and services. As an individual specialises,
they will produce a surplus (more than their needs), which they can
exchange for the surpluses of others.

ACTIVITY 3.2

Figure 3.3: Sugar cane harvest

Cane sugar is a valuable export crop for some of the world’s lower
middle-income countries in Africa and in the Caribbean. Sugar,
refined from sugar beet, is produced in the UK.
1 Explain why it is possible for producers in lower middle-
income countries and in the UK to each specialise in
producing sugar.
2 Think about the likely benefits and the risks to sugar
producers in lower middle-income countries and in the UK.
Where are the benefits likely to be greatest? Where are the
risks likely to be greatest?

Specialisation has resulted in a major expansion in global living

standards, but there are dangers too. The pace of technological change
means there is always the possibility that the specialist skills and
experience that any individual has acquired may become redundant as
the economy develops. Individuals need to be flexible and multi-skilled
and to be able to move between occupations. At regional and national
levels, changes in consumers’ wants can sometimes mean that the goods
and services produced in a region or country are no longer required in
the same quantity, so unemployment can result. Policies then have to be
adopted to deal with the economic and social problems that arise.

ACTIVITY 3.3

The aim of this activity is for you to consider the specialisms in

your own economy or an economy that is known to you. When
you have completed this, list the factors of production that are
responsible for why such specialisation has come about.
Try to rank the factors of production in terms of their importance.
In a pair, compare your list and your rankings.

REFLECTION

Activities 3.1 and 3.3 suggest that you compare your answers with
those of others in your class. How did your factors of production
and specialisms compare? How far were you able to agree any
differences? Did you find this a helpful way of learning about
factors of production?

The division of labour

With the technical advances of the last few hundred years, production of
goods and services has taken place on a much bigger scale. Large
numbers of workers within very large production units has allowed the
process of production to be broken down into a series of tasks. This is
called the division of labour. For example, the economist Adam Smith,
writing at the end of the eighteenth century, showed how the production
of pins would benefit from the application of the division of labour in a
factory. He suggested that pin making could be divided into 18 distinct
operations and that, if each employee carried out only one of the
operations, production would rise to 5000 pins per employee per day.
He had estimated that each employee would be able to produce only a
few dozen (about 50) pins each day if they produced pins individually.
Modern manufacturing processes are usually split up into a number of
tasks. A typical example is in a garment factory where each worker
produces one part of an item of clothing such as a shirt sleeve, the front
part or button holes. This division of labour is usually quicker and
cheaper than having one person complete each garment on their own. It
allows workers to become more specialised and can lead to an increase
in output per worker and an improvement in the quality of the finished
product.
In the United States, the division of labour was taken a stage further in
the 1920s when Henry Ford introduced conveyor belt production into
the automobile industry. Ford’s method of automobile production
provided the model for much of manufacturing production in the
twentieth century.

Figure 3.4: Conveyor belt production line at Ford’s automobile factory,

1934

Although the division of labour raises output, it often creates

dissatisfaction among the workforce as they become de-skilled and
bored with the repetitive nature of their work. In high-income
countries, the dehumanising impact of production techniques, such as
using a conveyor belt and robots, has been acknowledged and
procedures introduced to counteract boredom such as moving workers
around the production plant.

KEY CONCEPT LINKS

Scarcity and choice: Through specialisation and the division of

labour, resources that are available can be used to increase what is
being produced, so meeting more wants.
3.4 The role of the entrepreneur
Entrepreneurs are individuals who:
• organise production by putting together the various factors of
production to form a business opportunity
• are prepared to take risks by using their own money or by
borrowing from banks or other people to try to achieve their
ambitions. The risks are considerable and if their plans fail, they
will lose their own money and that of others.
Successful entrepreneurs are creative and innovate to produce
something that has recognised value in the market. They require the
skills and passion to anticipate current and future needs. Figure 3.5
shows the qualities and skills needed to be a successful entrepreneur.

Figure 3.5: Entrepreneurs require a range of qualities and skills.

THINK LIKE AN ECONOMIST

India’s top ten richest people in 2019

Ranking Name Net worth Source of wealth

in $
billion
1 Mukesh 51.4 Petrochemicals, oil, gas
Ambani
2 Gautam 15.7 Commodities,
Adani infrastructure
3 Hinduja 15.6 Various
brothers
4 Pallonji 15.0 Construction
Mistry
5 Uday Kotak 14.8 Banking
6 Shiv Nadar 14.4 Software services
7 Radhakishan 14.3 Investments, retail
Damani
8 Godrej 12.0 Godrej Group
family
9 Lakshmi 10.5 Steel
Mittal
10 Kumar Birla 9.6 Commodities
Table 3.1: India’s richest people in 2019

Look at Table 3.1. Then discuss the following statement in a

group:
India has many rich people, yet many people are living in extreme
poverty (defined as household income of less than $1.90 per day).
In researching this topic, you may find it useful to look at the
profiles of a selection of India’s richest people and to see how they
match the qualities and skills of entrepreneurs, as shown in Figure
3.3.
EXAM-STYLE QUESTIONS: MULTIPLE CHOICE

1 What are the factors of production?

A natural resources that are available for production
B another term for resources in an economy
C what are required in the future to produce goods and
services
D the human resources used in the production of goods and
services
2 The factor of production capital means:
A what is combined with land and labour to produce goods
and services.
B the value of assets owned by a firm.
C money needed to set up a firm.
D money provided by shareholders to expand production in
a firm.
3 Which of these is the best explanation of how an economist
describes an entrepreneur?
A someone who is lucky and makes a lot of money
B someone who succeeds in some but not all business
activities
C someone who is in charge of a firm
D someone who seeks out business opportunities and is
willing to take risks
4 Which of these is an example of land as a factor of
production?
A an airline pilot
B an airfield
C an aeroplane
D aircraft fuel
5 Specialisation can only occur when:
A a price has been agreed to buy and sell a product.
B a firm has modern methods of production.
C a firm is more efficient than all others in making a
product.
D an entrepreneur sees a business opportunity.
6 Three workers (A, B and C) are employed in a shoe factory.
The table below shows the output of each worker if they
divide their time equally between the three stages in the
production process.

Soles Uppers Finishing and

polishing
Worker A 100 40 40
Worker B 40 100 40
Worker C 40 40 100

Each worker is now asked to work on the part of the

production process where they are a specialist. What would be
the increase in the total production of shoes?
A 140 shoes
B 180 shoes
C 360 shoes
D 540 shoes
7 Which reason is most likely to explain why an entrepreneur is
prepared to take risks?
A to secure a large bank loan
B to realise a business ambition
C to justify giving up a safe job
D to increase their self-esteem
SELF-EVALUATION CHECKLIST

After studying this chapter, complete a table like this:

You should be able to: Needs Almost Ready
more there to move
work on
Understand the nature of the four
factors of production: land, labour,
capital, enterprise
Describe the rewards for each of
the factors of production
Explain the difference between
human capital and physical capital
Explain why more goods and
services can be produced in an
economy through the process of
specialisation
Explain that the division of labour
enables the more efficient use of
factors of production
Explain the role of the entrepreneur
as an organiser of factors of
production and a risk taker