Economics Grade 11 - Factors of Production

NKANGALA DISTRICT ECONOMICS NOTES

TOPIC 1: FACTORS OF PRODUCTION

UNIT 1: BASIC CONCEPTS & POPULATION AND LABOUR FORCE

Factors of Production

• Factors of production are resources (inputs) used to produce goods and services.
• Four factors of production are natural resources, labour, capital, and entrepreneurship.

1.1. NATURAL RESOURCES

• Natural resources are resources (inputs) that occur in a natural state and are used in the production process.

Characteristics of Natural Resources

• Gifts of nature:
  • Natural resources are provided by nature, and no human can make them.
  • They are sometimes called land because they are found on land (earth).
  • To use them in economic activities, they need to be excavated (minerals), grown (plants), and harvested (water).
• Supply is limited:
  • The quantity of natural resources is fixed to what nature provided.
  • It is mainly impossible to increase the supply of the majority of natural resources.
  • They are usually scarcer than their human demand, therefore, they can be exhausted.
  • Some natural resources can be increased, but this happens over a long period of time, e.g., trees take many years to grow into a forest.
• Uneven distribution:
  • Natural resources are unevenly distributed across the earth.
  • Some countries have more natural resources than others.
  • South Africa has a wider supply of a variety of minerals while it does not have other resources such as oil.
  • The quality of natural resources can also differ from one region to another.
• Natural resources need to be processed:
  • The majority of natural resources cannot be used in their natural state.
  • Producers need to use labour and capital to process natural resources.
  • This means natural resources are used as raw materials in production.
  • Therefore, countries with skilled labour and good capital are able to change natural resources into finished goods more efficiently.
• They are either renewable or non-renewable:
  • Renewable natural resources are those which can be replaced when exhausted.
  • For example, trees can be grown to replace forests lost due to deforestation.
  • Non-Renewable natural resources are not replaceable when exhausted (depleted), e.g., minerals.

Economic Importance of Natural Resources

• Production of finished goods:
  • They are used as raw materials which are processed into finished products.
  • Therefore, production of goods cannot take place without natural resources.
  • For example, to produce a television, 35 different minerals are required as raw material.
  • Electricity, which is produced from natural resources, is needed in order for any production to take place.
• Job creation:
  • Many job opportunities are created when natural resources are extracted or processed into finished goods.
  • For example, to mine gold, labourers are needed, and to change the gold into jewelry, other people such as jewelry designers are employed.
  • In South Africa, mining and agriculture often employ unskilled and semi-skilled labour.
  • Skilled labour is employed in the fields of geology, engineering, and surveying, which are important for the extraction of minerals.
• Export opportunities:
  • The country earns foreign exchange when natural resources are exported.
  • South Africa exports a variety of its minerals such as gold, diamond, etc.
  • This contributes positively to the country’s national income.
• They form the foundation of production:
  • The primary sector is concerned with the exploitation and extraction of natural resources and is regarded as the backbone of production.
  • This is because production in the secondary sector depends largely on the success of the primary sector.
• Enhance the quality of human life:
  • Natural resources improve people’s lives by providing beautiful sceneries e.g. forests (God’s window), natural parks (Kruger park) etc.
  • As people take holidays, their stresses melt away as the natural resources such oceans allow them to engage in activities which often leads to relaxation.

Remuneration of Natural Resources

• The payment (remuneration) for natural resources is called rent.
• Factors that determine the amount paid as rent are: increase in demand, quality of natural resources, distance to the market, increase in population, and climate.
  • Increase in demand: Because the supply of natural resources is fixed, the rent earned depends only on demand. This means if demand increases, the rent will also increase, while a fall in demand results in a decrease in rent.
  • Quality of the natural resources: rent paid for fertile land is often higher than the one for unfertile land.
  • Distance (proximity) to markets: the land closer to markets often fetch a higher rent than the one far from the market.
  • An increase in population: high population increases demand for resources such as land, therefore, this causes the rent to be high.
  • Climate: for agricultural product, a land in an area with a good climate fetches a higher rand than the land in an area with an unsuitable climate for crops.

1.2 LABOUR

• It is human physical or mental effort needed in the production process.
• This includes talents, skills, and knowledge of a worker.

Characteristics of Labour

• Labour differ in Categories

  • There are different categories of labour as per their skill and knowledge to do a job
  • Skilled labour have a higher level of knowledge and ability to do a job
  • Semi-skilled workers have low level of education and training; therefore, they lack specialized knowledge about the job.
  • Unskilled workers have no education and training pertaining to the job and they often perform work that requires physical effort.

• Labour is part of the worker

  • Labour cannot be separated from the worker as it is part of that worker.
  • The job can only be performed when the worker is present to give his/her labour.

• Labour cannot be stored

  • Labour cannot be stored for future use, so if not used it is lost for ever.
  • For example, if workers were on strike, their labour for that day cannot be regained.

• Labour is fairly immobile

  • Geographical and occupational mobility of labour is very low.
  • Geographic mobility is a worker’s willingness to move to another area for a job Working people often are reluctant to move to other areas for various factors such as not wanting to be far from family and friends.
  • Occupational mobility is the willingness and ability to move to a different kind of a job.
  • Factors such as lack of qualification often play a role in people not being able to do other jobs than their current one.

• Labour cannot be increased in a short period

  • The number of workers available depends on the labour force of a country.
  • If an increase in required, it would take time because the unemployed people will have to be trained first.

• Demand for labour is a derived demand

  • Labour is demanded only if there is a demand for goods and services.
  • Workers will be hired to work with other inputs to produce goods and services needed.
  • If no goods and services are not demanded no labour will be demanded

• The quality of labour differ

  • No two workers are exactly the same, even those who have the same qualifications.
  • The quality of work given by a worker depends on many factors e.g. attitude toward the work, health, experience, working conditions etc.

Economic Importance of Labour

• Labour is the most important factor of production

  • Production cannot take place without labour, as all forms of production need labour to take place. Even the automated production systems still need some labour for them to function.

• Payment for labour is main source of income for households

  • Wages and salaries earned for providing labour help to buy goods and services needed by households
  • The change in labour wages influences households’ standard of living.
  • Increase in payment improves the quality of life while decrease in payment for labour will decrease the quality of household lives.

• The quality and quantity of labour is important

  • Labour that is of higher quality (skill) leads to improved productivity.
  • Larger quantity of labour allows for increased production and high economic growth.

• Labour income contributes to national income

  • Salaries and wages of workers’ form the largest portion of the total income of any country.

• Women contribution to labour force

  • The number of women who are employed has been increasing over the years.
  • This represent an increase in skill and knowledge and also expand the contribution of labour as a factor of production.

Remuneration for Labour

• The remuneration that workers receive for their labour is wages and salaries.

• Wages are weekly (or bi-weekly/fortnightly) payments while salaries are paid monthly.

• Wage rate are determined by demand and supply of labour in the labour market.

  • If the supply of labour (job seekers) is higher than demand (employers looking for workers), the wage rate will be low.

• Two kinds of wages are nominal wages and real wages

  • Nominal wages refer to the amount of money in rands (currency) that a worker receives for his labour e.g. R5000.
  • Nominal wages are not affected by inflation (increase in prices).
  • Real wages refer to the quantity of goods and services that a worker can buy with his nominal wage.
  • Real wages are affected by inflation (price increases). When prices increase, the number of goods that can be bought with the same nominal income will decrease.

1.3 CAPITAL

• Capital is goods that are used to produce other goods and services e.g. machinery, tools, buildings, vehicles etc.
• Capital is divided into two kinds, namely physical capital and financial capital.
  • Physical capital: refers to the goods that are used to produce other goods.
  • Financial capital refers to money that is used to buy capital goods. This means financial capital is needed to acquire physical capital.

Characteristics of Capital

• Capital goods are manufactured

  • Capital goods are man- made resource that are used to make other goods.

• Capital has an owner

  • Capital belong to an owner who can be a firm, an individual producer or government.

• Capital has limited life-span

  • Some capital such as machinery lose value (depreciate) over time due to wear and tear.
  • Some may become outdated due to technological progress. Eventually all depreciated and outdated capital will need to be replaced.

• Capital formation need sacrifice

  • Capital formation (investment) is when capital goods are produced or bought.
  • The money needed to buy or produce capital goods often come from savings.
  • Producers can use their own savings to make investment (buy capital goods) or they can make loans from the bank to make such investments.
  • Banks are able to give loans because of saving that they receive from their clients.
  • Saving is part of current income that is not consumed.

Economic Importance of Capital

• Capital increases efficiency in production

  • The use of capital goods helps to improve productivity of labour.
  • Capital enable labour specialisation whereby different workers can be doing different work in producing a particular product.
  • It allows large scale production of goods and services possible at lower cost.

• Capital creates economic growth

  • Capital goods enable producers of goods to produce more goods and services.
  • For economy to grow capital can either be widened or deepened.
    • Capital widening: is when the stock of capital grows at the same rate as the labour force. E.g. if a firm has 100 workers and 100 tools and machines combined, if it increases its workers by 10 it should also increase the stock of capital by 10.
    • This will keep the production level (economic growth) constant.
    • Capital deepening: is when the number of capital goods per worker increases.
    • This means the rate of increase in capital goods is higher than the rate of increase in workers. Each worker has access to more and different kinds of machinery and tools to be productive.
  • Capital deepening can result in increase in economic growth and improvement in standard of living.

• Capital goods make standardisation possible

  • Machines are able to produce goods that are exactly of the same quality.
  • It allows for production of same quality products because machines are made to be accurate

Remuneration for Capital

• The payment for the use of capital is called interest.
• This is the amount the producer pays as a price for the loan received for buying capital goods.
• Banks decide on a percentage by which the interest will be calculated. Interest rates are different for different borrowers. Interest rate is influenced by the following factors:
  • Risk of investment: if the bank regards the borrower as a high risk for it not to get its money back, the interest rate charged is often high
  • Period of loan: the longer the term over which the loan is going to be repaid, the higher the interest rate charged.
  • Supply of funds: if many people save and banks have higher supply of money, it is often easier to obtain lower interest on loans
  • Monetary policy: the reserve bank can cause an increase in interest rate by increasing its repo rate.

1.4. ENTREPRENEURSHIP (possible essay)

• Discuss in detail entrepreneurial skill as a factor of production
  • Definition, characteristics, importance, remuneration
• Entrepreneur is a person who has the ambition and ability to open and successfully run a business enterprise.

Characteristics of an Entrepreneur

• Entrepreneurs have good decision making skills:

  • they make decisions of what to produce and how much to produce and for whom to produce.
  • This means they have to analyse their market to ensure that the product produced is what the consumer want.

• Entrepreneur is an organiser

  • They organises and coordinates the three other factors of production to ensure efficient production takes place.

• Driving force behind production

  • They take initiative to exploit new ideas which can improve the products or create new ones.

• They are risk taker:

  • they take risk by investing their money in a business without guarantee that it will be successful.
  • They have the ability to cope with uncertainty and stress that comes with taking risks.

Economic Importance of Entrepreneur

• Ensure production takes place

  • By combining all other factors of production, they ensure that goods that are used to satisfy human wants and needs are produced.

• Create employment

  • Big and small businesses create jobs for labour, which is an important factor of production.
  • Very small enterprises often employ only the owner, therefore entrepreneurship can be a source of self - employment. This take away the reliance on someone to create jobs.

• They ensure productivity is achieved

  • Entrepreneurs ensure that factors of production are used efficiently in producing goods and services. If they do not ensure efficiency they will suffer losses.
  • Efficiency in production can lead to economic growth.

• They contribute to capital formation

  • Entrepreneurs often make profits, part of which they often save.
  • These saving are made available in the form of loans to firms for buying capital goods.

Remuneration for Entrepreneurship

• Entrepreneurs’ payment for their participation in the production process is called profit.
• The amount of money an entrepreneur receives can be influenced by the following factors:
  • The type of business: a business which affect necessities such as food is often unaffected by economic changes, so profit made can be high. The demand of luxury good is often postponed when economic situation is unfavourable, so this can affect the sales and profit made.
  • The level of competition: the higher the number of producers of the same product the higher the competition. This can affect some entrepreneurs negatively by reducing their profit
  • Government intervention: setting of minimum wages can reduce the profit of entrepreneurs as it is higher than market price.

UNIT 2: COMMUNITY PARTICIPATION IN LOCAL ECONOMIC PLANNING

• The residents of a particular community can participate in local economic planning and activities through the following ways
  • Municipal/local government election: planning and implementation of economic activities is done by town councils which are elected by the residents. Community members exercise their right to elect the persons who form the council.
  • Community forums: public meeting whereby government officials and community members to listen to people’s concerns and ideas regarding local development.
  • Using the media: citizens can use various media e.g. newspapers, radio, social media etc. to make their opinions known to by the government
  • Petitions and legal demonstration: citizens can organise legal peaceful march to demonstrate their unhappiness and to hand over a petition (request) of their concerns to the government.

UNIT 3: ECONOMICALLY MARGINALISED GROUPS

• These are people who are excluded from participation in economic activities.
• Examples of marginalised group are uneducated people, rural people, disabled people, refugees, school leaving youth
  • they often are not having access to job opportunities, housing, medical and other facilities.
• People are therefore economically marginalised for various reasons such as discrimination, being physically or mentally challenged, they are unskilled, or even due to ignorance.

GOVERNMENT ACTION TO IMPROVE SITUATION OF THE ECONOMICALLY MARGINALISED GROUP

• Empowerment

  • Marginalised groups are empowered when they have equal access to resources and opportunities.
  • Government has formulated legislations (laws) that can lead to the empowerment of the marginalised groups
  • One of the legislations to empower the marginalised group is the Black Economic Empowerment (BEE, BBBEE) which aim to increase the number of the previously disadvantaged people in economic participation.
  • Reconstruction and Development Programme (RDP) policy enabled people to obtain services such as basic health care and basic education for free.
  • The Expanded Public Works programme is a government initiative to create short term employment. The aim of EPWP is to empower the marginalised group by allowing them to acquire some skill and earning income from the jobs.

• Procurement

  • Procurement is a process whereby government buy goods and services it needs to function.
  • The Procurement Act encourages the government where possible) to prioritise the purchase of goods from the previously disadvantaged people e.g. blacks, women, disabled etc.