CHAPTER 14

The Factors of Production and Sectors of the Economy

Definitions
Production=process that involves converting resources into goods or services
Factors of production=resources used to produce goods and services, such as land, labour,
capital and enterprise
Human capital=value of the workforce or an individual worker
Labour=people used in production
Working capital or circulating capital=resources used up in production such as raw materials
and components
Fixed capital=stock of man-made resources such as machines and tools, used to help make
goods and services
Entrepreneurs=individuals who organise the other factors of production and risk their own
money in a business venture
Capital intensive=production that relies more heavily on machinery relative to labour
Labour intensive=production that relies more heavily on labour relative to machinery
Primary sector=production involving the extraction of raw materials from the earth
Secondary sector=production involving the processing of raw materials into finished and
semi-finished goods
Tertiary sector=production of services in the economy
De-industrialisation=decline in manufacturing
Assembly plants=factory where parts are put together to make a final product

Factors of production

 Land: space to locate and operate the business, natural resources (oil, coal), fertile
soil, rivers
 Non-renewable/ once they have been used cannot be replaced (coal,
diamonds, limestone) one day will run out
 Renewable (forests, water) if they are overexploited might run out
 Labour: workforce in the economy/ each worker has different set of abilities, skills/
increase value of human capital through training, education/ workers more
productive
 Capital: artificial resource/ made by labour
 Working capital or circulating capital/ stocks of raw materials and
components/ stocks of finished goods waiting to be sold
  Fixed capital/ factories, shops, offices, machines, tools, equipment, furniture
used in production/ fixed because it won’t convert into finished product
 Enterprise: entrepreneurs responsible for setting up and running business.
 Business idea: production of new product, supply goods and services
produced by others
 Business owners: provide money to set up business responsible for its
direction
 Risk: risk their own money/ if business collapses may lose some or all their
money/ if business successful they make profit
 Entrepreneurs responsible for organising the other three factors of
production: buy and hire resources/ skills, decision making, people
management, time management to organise production factors effectively
Labour and capital intensive production
Some firms use more labour than capital in production/ labour intensive
If more capital used in production then capital intensive
FMCGs=fast moving consumer goods
Primary sector
Economic activity classifies into three sectors.

 Agriculture: farming activities, food production

 Fishing: netting, trapping fish, catching seafood
 Forestry: managing forests, timber into wood products, protecting natural
environment/ wildlife
 Mining and quarrying: extraction of raw materials(coal, iron ore) extraction of oil, gas
Secondary sector
Converting raw materials into finished or semi-finished goods/ manufacturing, processing,
construction. (Metalworking, car production, engineering)
Semi-finished goods/ intermediate goods/ producer goods
In developed countries secondary sector declined
Tertiary sector

 Commercial services: delivery, employment agencies

 Financial services: banking, insurance
 Household services: decorating, house maintenance
 Leisure services: television, tourism
 Professional services: medical care, legal advise
 Transport: train, taxi, bus
Changes in the importance of different sectors
Sectors grow and decline according to social and economic changes
Why has manufacturing declined and services grow?

 People prefer to spend more of income on services than goods

 Fierce competition in manufacturing from developing countries
 As countries develop, public sector grows (mainly provides services)
 Advances in technology/ machines replace people
Developed and developing countries
In developed countries primary sector less important than tertiary. Small percentage of
workforce in primary.
In developing countries secondary growing, expansion in tertiary.
Undeveloped/ most people employed in primary sector

CHAPTER 15
Productivity and Division of Labour
Definitions
Productivity=rate at which goods are produced, and the amount produced in relation to the
work, time and money needed to produce them
Job rotation=practice of regularly changing the person who does a particular job
Division of labour=breaking down of the production process into small parts with each
worker allocated to a specific task
Specialisation=production of a limited range of goods by individuals, firms, regions or
countries
Piece rate=amount of money that is paid for each item a worker produces, rather than for
the time taken to make it

Business produce more output if productivity raised. Productivity is the output per unit of
input. Productivity of labour is the output per worker.
Productivity = total units of output divided by units of inputs e.g. Dividing total output by
number of workers employed
Raising productivity is desirable/ more goods and services produced with same or fewer
resources
Factors affecting productivity
Productivity improved if business make better use of resources (production factors)
1) Land: quality of land/ fertile to grow crops/ dry, mountainous=useless/
measures can make agricultural land more productive
 Fertilisers and pesticides – chemicals to improve health and appearance of
plants/ pesticides used to kill pests saving crops/ however may harm people,
wildlife, environment therefore strict controls for their use and sale
 Drainage – some land unproductive because flooded/ drainage used to
improve flow of water off the land making it productive
 Irrigation – redirecting water from natural sources (rivers, lakes) to lands that
need more water, becoming productive/ mainly used in dry seasons, rainfall
shortages
 Reclamation – create new land from lakebeds, riverbeds/ water drained from
wetlands/ more land increasing productivity
 Genetically modified crops – transferring genes, DNA from one organism to
another/ plants less likely affected by disease/ more appealing to consumers/
however some opposition as genetic engineering is unpredictable/ negative
health effects
2) Labour
Human capital improved=labour productivity rises

 Training – invest in training/ increasing knowledge, skills of workers to

do job more effectively/ perform better, improve employee
motivation/ productivity higher/ government can invest in
educational system/ more equipment to schools, improving quality of
teaching/ vocational education/ firms can provide their own training
to workers
 Improved motivation – financial incentive as piece rates, paying
workers according to how much they produce/ however some
workers not motivated by money (non-financial incentives)/ job
rotation, employees changing tasks from time to time/ people trained
to do different jobs time at work more interesting, more variety/ less
bored, more motivated
 Improve working practices – methods used by workers in work/
flexible working hours/ improved facilities (gym, restaurants) / playing
background music/ employee of the month
 Migration – attracting skilled workers from overseas/ however some
may not be as skilled but still increase productivity/ work hard
3) Capital
New technology, more capital employed at expense of labour/ new technology more
efficient than old

 Primary sector – use of machinery (tractors, combine harvesters) increase output,

reduce waste, improve working conditions
  Secondary sector – factories employ equipment, machinery/ use of robots (repetitive
work) reduced need to employ people in boring, demotivating jobs/ use of
computerised machines
 Tertiary sector – internet shopping/ unstaffed checkout systems/ technological
advances in medicine, surgical techniques/ developments in new vaccines help
patients
Division of labour
Allows people to concentrate on the task at which are the best.
Division of labour and the worker

 Advantages: 1.focusing on same task allows worker to become more skilled at task/
repetition of task means worker get better and better/ 2.workers with high skills may
be employed more easily and get more money/3. Learn new skills/4. more job
satisfaction
 Disadvantages: 1.problem of specialisation work might become boring caused by
repetition, it task requires little skill/2.boredom, dissatisfaction, affect motivation/
3.health implications to workers (joint wear) /4. If too specialised then risk of
unemployment as cannot carry out other task, useless to some firm
Division of labour and business
If workers more specialised efficiency improves, business make more profit.
- Advantages
 efficiency improved through specialisation, workers perform quickly and
accurately, fewer mistakes/ productivity rises/ people performing more tasks
may find difficulties to skills required and productivity might be lower
 use of specialist tools, machinery, when workers specialise
 production time reduced as workers won’t waste time moving from one task
to another/ moving around workplace, workstations
 organisation of production easier/ specialised workers fit easily to structured
system of production
- Disadvantages
 If tasks too repetitive, boring people become dissatisfied, poorly motivated/ poor
quality work/ arriving late at work/ increased rate of absence/ high staff turnover/
reduce productivity/ impact on profitability
 Problems if one stage of production depends on other/ if one stage breaks down
production may have to stop/ interdependence
 Specialisation may result in loss of flexibility in workplace/ if specialised worker
absent then production will be disrupted

CHAPTER 16
Business costs, revenues and profit
Definitions
Costs=expenses that must be met when setting up and running a business
Fixed costs=costs that do not vary with the level of output
Variable costs=costs that change when output levels change
Total cost=fixed costs and variable costs added together

Examples of fixed costs: rent/ advertising/ insurance/ interest payments. Fixed cost won’t
increase if more output/ but still has to be met if firm produces nothing (overheads)
Examples of variable costs: raw materials/ packaging/ fuel/ labour. If firm produces nothing
variable cost will be zero. (TVC=VC*Q)
Total cost (TC=TFC+TVC)
Average cost is cost of producing a single unit of output (AC=TC/ Q) average cost curve U-
shaped as output increases average costs fall at first reach minimum and then start rising.
Total revenue is the amount of money a firm receives from selling its output (TR=Q*P)
Profit (P=TR-TC)
(Notebook/Ch.16/page*)