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Unit - 2

Factors of Production

What are the Factors of Production?

Most economists identify four factors of production. These are
land, capital, labour and enterprise.
Some economists, however, claim that there is really only three
factors of production and that enterprise is a special form of

Economic resources are used to produce goods and services

and are in limited supply.
This unit explores the key characteristics of the factors of
influences on their supply and also discusses the mobility of
this factor.

- Land in general terms includes the earth in which crops are grown
and on which offices and factories are built.
- But in economics terms it has a wider meaning.
- It covers any natural resource which is used in production.
- Besides the land itself, it also includes what is beneath the land
such as coal.
- what grows naturally on the land e.g. rainforests and the sea,
oceans and rivers and what is found in them.

gifts of nature available for production

The supply of land

The amount of physical land in existence does not change much with time.
There is a certain degree of soil erosion which reduces the supply of arable land
but also a certain amount of land recovery which increases its supply.
Other natural resources, however, can change quite significantly. Rainforests
are currently declining at a rapid rate.
Some natural resources are renewable whilst others are non-renewable.
Renewable resources, for instance wind power, are replaced by nature and hence
can be used again and again. There is a risk that renewable resources can be
turned into non-renewable resources if they are over-exploited, that is used at a
faster rate than they are refilled.
Over-fishing can diminish numbers to a point where they cannot be restored.
In contrast, non-renewable resources, e.g. gold and oil, are reduced by use.

The mobility of land

- Most land is occupationally mobile.
- This means that it can be used for a number of purposes.
- Land which is currently being used for farming may as an alternative be
used to build houses. Trees can be used to make tables or sleepers for
railway lines.
- Land, in its traditional sense, is however geographically immobile.
- It is not possible to move a section of land from Sri Lanka to India, for
- Some forms of land, in its wider meaning, can be moved to a certain
extent. For example, the course of rivers can be diverted and wildlife can
be moved.


-> Identify two forms of land that are

Capital is any human-made (manufactured) good used
to Produce other goods and services.
For example, offices, factories, machinery, railways
and tools.
Capital is also referred to as capital goods and
producer goods.

Capital goods are not wanted for their own sake but
for what they can produce.
In contrast consumer goods, such as food, clothing
and entertainment, are wanted for the satisfaction
they provide to their owners.
In deciding whether a good is a capital or a consumer
good, it is necessary to consider who the user is and the
purpose of its use.

Feed back
Decide which of the following are capital goods &
consumer goods:
a. a chocolate bar
b. a car
c. a child's toy
d. a farm tractor
e. a dentist's drill
f. a courtroom.

A computer, for example, will be a capital good if it

is used by an insurance company to process
insurance claims - it is producing a service.
If, however, it is used by a person to play games, it
is a consumer good.

human-made goods used in production

The supply of capital (Why, in which Area)

- The supply of capital tends to increase with time.
- Every year some capital goods physically wear out and some
become outdated.
- A farm barn may fall down, for instance, and some machinery
may be replaced by newer, more efficient machinery.


The total value of the output of capital goods produced

is referred to as gross investment or sometimes just
The value of replacement capital
depreciation or capital consumption.



Feed back
Net investment is the value of the extra capital goods
It is equal to gross investment minus depreciation.
For instance, if a country produces $200m capital
goods one year and there is depreciation of $70m, net
investment is $130m.
Occasionally gross investment may be lower than depreciation.
This means that some of the capital goods taken out of use, are
not replaced.
This is said to be negative net investment.

Feed back
A firm is currently using 12 machines. Each machine
is capable of producing 100 units of output. It
anticipates that by the end of the year, 3 of its
machines will wear out. If it expects to sell 1,600 units
next year:
a. how many machines will it buy?
b. Why in the future may fewer machines be needed to
produce the same output?

The mobility of capital (Where & How)

A coal mine and a dock, however, are fixed in position
since their geographically immobile. They are also
also immobile. There use cannot be
changed, as they have been made for specific task.

The mobility of capital (Where & How)

The geographical and occupational mobility of capital
varies according to the type of capital goods.
Some types of capital goods can be transferred from
one part of the country to the other.
A photocopier used by a bank in one area of a country
can be sold to and then used by a bank in another area.

Labour covers all human effort - both mental and physical
involved in producing goods and services.
A road sweeper, a steel worker all contribute their labour.
Education, training and experience that workers have gained.
The more human capital workers have, the more they should
be capable of producing.


The supply of labour

The supply of labour is influenced by two key factors.
One is the number of workers available and the second
is the number of hours for which they work.

The supply of labour

The number of hours, for which people work, is
influenced by (among other factors):
1. the length of the average working day.
2. whether they work full or part time.
3. the duration of over-time.
4. the length of holidays availed by workers.
5. the amount of time lost through sickness and illness.


They face - insurable risks

- uninsurable risks

Enterprise is the willingness and ability to bear

uncertain risks and to make decisions in a business.

The supply of Enterprise (Why, in which Area)

Entrepreneurs are the people who

Organize the other factors of production
Bear uncertain risks and to make decisions in a

The mobility of Enterprise (Where & How)

- Enterprise is the most mobile factor of
- The skill involved can be applied in every
- They are occupationally & geographically

-A good education system, including university degree

courses in economics and business studies, may help to
develop entrepreneurs in an economy.
-Lower taxes on firms' profits (corporate taxes) and a
reduction in government regulations may encourage more
people to set up their own businesses.

Feed back
The following is a list of economic resources. In
each case, decide whether the resource is an
example of capital, enterprise, labour or land:
a. chemical fertilizer
b. a school
c. a lake
d. the work of a nurse
e. the initiative needed to set up and run a bicycle
repair shop