Unit 1.2 - The Basic Economic Problem

1.2 - The Factors of Production

Definition: Economics is the scarcity of limited finite resources and unlimited wants that necessitates choice which results in an opportunity cost.

Resource Allocation - involves deciding how best to use scarce resources to satisfy as many needs and wants as possible

Consumers and governments only have a limited amount of money but have many needs and wants to satisfy.

Capital → man-made resources/ products

Enterprise (entrepreneurship) → business know-how/ management/ business skills

Land → natural resources

Labour → human resources (physical and mental skill)

*Reward/ factor payment:

Capital → Interest

Enterprise → Profit

Land → Rent

Labour → Wages

@@Capital:@@

• Goods that can be used to create goods or services
• Good produced with labour

Land:

Non-renewable

• e.g. oil, gasoline, silver and iron ore.

Renewable

• e.g. Climate factors like wind and sunshine are also renewable sources of land, which can be used for wind and solar farms.

Net investment is the value of the extra capital good produced. It is equal to gross investment minus depreciation.

Production: Production of goods and services is organised by entrepreneurs in firms.

Consumption: Firms produce goods and services to satisfy consumers needs and wants.

Note*:

Money is not a factor of production, it is a medium of exchange.

Productivity: output per input

Factor mobility:

• Occupational mobility: the resource is able to change task e.g. in labour, electrician becomes an electrical engineer
• Geographic mobility: the resource is able to move from one location to another e.g. robot from China can move to India
• FOP mobility (Least to Most):
  • geographical - land, capital, labor, enterprise
  • occupational - capital, labor, land, enterprise
  • Singapore availability - land, enterprise, labor, capital
  • quality - land, enterprise, labr, capital

Mobility of labour

Occupational mobility: For instance, a high-school economics teacher may switch jobs to become a high-school business studies teacher.

Geographical mobility: An example of geographic mobility of labour is a highly trained individual from an undeveloped economy migrating to an industrially advanced economy.

Reasons for labour geographical immobility:

• family ties
• regulations
• lack of information/opportunities
• differences in cost of living
• differences in education

Mobility of capital

Occupational mobility: For example, a tourist bus could be easily repurposed and sold to a freight company

Geographical mobility: For example, a rent-a-car business can sell its cars as a fleet to another rent-a-car business.

Mobility of land

Occupational mobility: land itself can be used to raise cattle or instead be used to build a stadium.

Geographical immobility: cant move land from one country to another

Mobility of enterprise

Occupational mobility: someone who has skills in the car industry can do it in a textile (clothing, design) industry

Geographical mobility: someone who successfully started a business in one country can do so in another

RECAP:

• Define land, labour, capital and enterprise

land is the FOP that comes from natural resources to produce goods and services

labour is the FOP that comes from human mental and physical skills to produce goods and services

capital is the FOP that comes from tool and materials used to produce goods and services

enterprise is the FOP that comes from business know how and management skills

• Explain the characteristics of the factors of production

land, labour, capital, enterprise

• Evaluate the influences on the mobility of the factors of production

occupational mobility is when the resource is able to change task and geographical mobility is when the resource can move location.

• Evaluate the causes of changes in the quantity and quality of the factors of production.

there is be a change in quantity and quality of factors or production if there is a change in demand and supply