1.3 - factors of production

Factors of production

the resources or inputs available in an economy that are used in the production of goods and services.

Land

the natural resources in an economy. 

e.g. land itself (soil and trees), oil, coal, rivers, sun, climate.

Geographically immobile - cannot move from one place to another 

Occupationally mobile - can change its use

• The quantity and quality of land is important. 

  • e.g. too much rain can be of little productive use for agriculture.

  • e.g. poor soil quality is also of little productive use.  

Reward - rent is paid for the use of land. 

Labour

the human resources available in an economy. 

e.g. a teacher, doctor, shop assistant or cashier, 

• The quantity and quality of labour is very important:

  • Some developing countries have  large populations, but suffer from a lack of well trained and well educated workforce - therefore are less productive.

  • In some countries, there may be restrictions on women working.  

Reward - wages are paid for the use of labour’s services. 

Capital

the man-made resources that aid the production of goods and services. 

e.g. actories, offices, machinery, transport vehicles, IT, infrastructure (roads, railways, electricity, water supplies).

• The quantity and quality of capital is very important as a source of economic growth.

Reward - interest is paid for the use of capital - this is the payment for borrowing money to buy capital.

Enterprise

a form of human capital which involves organising production and taking risks. It organises the other FOP so as to produce goods and services.

e.g. Richard Branson (Virgin Group), Bill Gates (Microsoft), and many people who start up small businesses. 

Reward - profit is paid to entrepreneurs.

Physical capital

a factor of production (better known as capital) such as machinery, buildings and infrastructure.

Human capital

the value of labour to the productive potential of an economy. 

• e.g. skills, knowledge and experience of labour that is being used to produce goods and services. 

  • Therefore, it can be seen as an investment to increase the future economic growth of an economy.

Specialisation

the process by which individuals, firms and economies concentrate on producing those goods and services where they have an advantage over others. 

• At the level of a worker, an individual may specialise for example as a heart surgeon or as an economics teacher. 

• Individuals concentrate on what they are best at (ironing and cooking while another does the shopping and cooking) so more goods and services will be produced.

  • However, no one is self-sufficient (able to produce everything they need) - therefore, it is necessary to trade with others. 

    • Those who specialise will produce a surplus, which they can exchange for the surplus of others. 

• Specialisation has resulted in an improvement in global living standards.

  • However, the pace of technological change means that there is always the possibility of workers being at risk of losing their jobs if their skills become redundant or if consumers’ wants change.

    • Therefore, workers need to be flexible and multi-skilled and able to move between occupations.

Division of labour

where a manufacturing process is split up into a sequence of individual tasks. 

• Workers specialise in, or concentrate on one particular task.

• It can lead to an increase in output per worker, an improvement in the quality of the final product and increased earning potential for workers as they become more skilled.
  

Henry Ford example

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.

Adam Smith example

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.

Limitation of specialisation

However, it may lead to dissatisfaction among workers as they become de-skilled (thus occupationally immobile) and bored with the repetitive nature of their work. 

Evaluation of the limitations of specialisation

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.

Entrepreneurs are individuals who:

• are willing to take risks in starting up a business by using their own money or borrowing from banks to try to achieve their ambitions.

• organise the other factors of production so that production can take place/to form a business opportunity.

Qualities of a successful entrepreneur:

• Are leaders

• Make a business opportunity by organising factors of production

• Are prepared to take risks

• Are creative and innovative

• Produce something that the market wants

• Anticipate current and future needs

• Make the right decisions