Chapter 5: Factors of production

Main factors: Capital, Land, Labour, Entrepreneurship

**Capital: is the man-made resource used in production

Example: Machines, raw materials
Human capital: Knowledge / Skills
Can be increased by human effort
Return of capital: Interest

Capital formation (Investment): Production of capital goods

-increase in capital goods
-replace depreciated capital to increase productivity
-give up present consumption for future consumption (creating capital goods)

Capital consumption (Depreciation): Reduction of capital goods due to wear-and-tear and

obsolescence in production
-reduce in capital goods

Capital accumulation: net increase in the stock of capital goods

Equation: Capital formation - Capital consumption
-can be positive (capital consumption) or negative (capital goods decrease)
-capital consumption only refers to the positive case
-Capital formation > capital consumption = capital accumulation (increase in the stock of capital
goods)

**Land: all natural resources used in production. It is a gift of nature.

Example: Wind, sunlight, rain, forest, animals
-only those who did not go through man-made processes (relocation) are land
(if the penguins are moved from Antarctica to Ocean Park, it becomes capital)
-no production cost is involved in land’s creation
-supply cannot be increased / created using human efforts
-return: Rent

Land vs Capital

Land Capital

Definition Natural resources (gift of Man-made resources

nature)

Return Rent Interest

 Production cost Not involved Involved

Supply increase NOT by human efforts By human efforts

Relocation / Modified by Becomes capital Is still capital

human effort

**Labour: is the human effort, both mental and physical, used in production.

Labour supply: total number of working hours that workers provide (man-hours)
Math: Labour supply = Number of employed x Number of working hours per worker
****(unit man-hour)****

Factors affecting supply of labour :

1) Size of population
(more people, more working hours)
2) Proportion of working population
(more eldery in a population, less working hours)
-working population: above 15 years old, not yet retired
3) Number of working hours
(more public holidays, fewer working hours)
4) Monetary rewards and future prospects
(the better the reward and prospect, more people move to the region for work. Labour supply
increases)
5) Government policies
(raising retirement age → more people working → labour supply increase
Reduce unemployment benefits → more people look for jobs → labour supply increase)

Productivity of labour:
Use average labour productivity to determine
Math: Average labour productivity = Amount of output ÷ Labour supply
****unit: unit of (_____) per working hour*****, where (_____) is the product

Factors affecting average labour productivity:

1) Education and training
-more knowledge, experience and skills, average labour productivity improves
2) Working conditions
-better / tidier working conditions, A.L.P. improves
3) Technology level of producer goods
-using more advanced producer goods improves A.L.P.
4) Health of workers
-Healthier → perform better → A.L.P. improves
5) Organization and managing labour
Wage Payment methods:

Piece rate: based on the quantity of output produced

-output is standardized, and easy to measure
-example: 3 dollars per toy produced
Advantages Disadvantages

Employer: Labour productivity will be Employer: Cost of quality control is higher

higher (workers income depend directly on (because workers may rush for more output)
output)

Greater incentive to work hard, so cost of

monitoring workers is lower

Production costs are easier to control (as

wages are paid according to output level

Employees: Earn more by working harder Employees: Less stable income (paid
according to output level)

Time rate: based on the amount of time a worker works

-output is not standardised, tasks may change frequently
-example: $20000 per month
Advantages Disadvantages

Employers: Maintain a static team (income Employers: Cost of supervising workers is

of workers are more stable) higher (due to shirking)

Cost of measuring workers’ output is Workers incentive to work is lower

lower (paid on time basis, not necessary to
measure to determine wage)

Cost of quality control is lower (workers do

not rush for output)

Employees: Earn a stable income Employees: Nil

Basic salary plus commission: regular basic salary + performance based
commission
-output is easy to measure but not standardised
-example: $10000 (basic salary) + $5000 x number of deals
Advantages Disadvantages

Employer: workers have greater incentive to Employer: Cost of measuring output and
work hard (earn more commission), cost of performance is higher (to calculate the
supervision is lower wage)

Employee: Basic salary safeguards income Employee: Income are less stable (depends
on performance)

Earn more money by working harder

Profit-sharing: given percentage of company’s profit

-performance is measured by quality, not quantity
-usually for company’s senior executives

Tips: money paid by customers directly to someone who provides services

-Quality of output is hard to measure by supervisors, but easy to measure by customers
-Low basic salary + tips
Advantages Disadvantages

Employer: workers have greater incentive to Employers: Nil

work hard (earn more commission), cost of
supervision is lower

Part of business risk is shared by workers***

Employees: Earn more by performing better / Employees: Income are less stable (depends
providing better services on performance)

If business suffers a loss, they may not get

paid (sharing business risk)
Entrepreneurship: human efforts that make decisions and bear production risks
Return: Profit
1) Bears risk in production (may suffer loses)
2) Making major decisions in operation and management
3) Manage and coordinate factors of production

Points to note:
1) SPELLING
2) Entrepreneur can also be labour, depending on what services he / she provide
(e.g. Mr Wong is the owner of a car repairment shop. He also helps fix the cars.
Human effort (fixing car) and risk bearing (the shop may suffer from losses) is included. Mr
Wong is both labour and entrepreneur.)

Occupational mobility: the ability and willingness of a factor of production to change from
one occupation to another.
Geographical mobility: the ability and willingness of a factor of production to move from one
place to another.

Factors affecting Occupational mobility

1) Monetary and non-monetary rewards
More rewards (high income, job satisfaction, prospects) → opportunity cost of changing occupation
increase → LESS LIKELY to change jobs → Occupational Mobility decrease
2) Skill requirements
Require specialized skills → more time in training → less willing to give up jobs → occupational
mobility decreases
3) Entry barriers / Professional body restrictions
Strict licensing requirements → reduces occupational mobility
4) Retraining programmes
Acquire skills demanded for other jobs → occupational mobility increases
5) Labour market information
More information about job vacancies → find new jobs → Occupational mobility increases

Factors affecting Geographical mobility

1) Transport costs
Transport costs high → less willing to travel → Geographical mobility decrease
2) Economic conditions
Less developed countries: want to work in places with higher wages → higher Geographical mobility
More developed countries: already have good wages and prospects → do not want to move to other
places → lower geographical mobility
3) Political and social conditions
Political unstable → people want more stable environment → move to other places → higher
geographical mobility
4) Immigration and emigration policies
Relaxed immigration and emigration policies → easier to move from one place to another → higher
geographical mobility