SECTION 1

The basic economic problem

Chapter 2
Factors of Production

Factors of production: are economic resources used to produce goods and services.
Most economists identify four factors of production:
• Land
• Labor
• Capital
• enterprise.
Some economists, however, claim that there are really only three factors of production and
that enterprise is a special form of labor.

Land: covers any natural resource which is used in production.

Labor: covers human resource which is used in production. This includes both the mental and
the physical effort, involved in producing goods and services.
Capital: covers financial resources which is used in production. Capital is any human made
(manufactured) good used to produce other goods and services. It includes, for example, offices,
factories, machinery, railways and tools.
Enterprise: is the willingness and ability to bear uncertain risks and to make decisions in
a business.
Entrepreneurs: are the people who organize the other factors of production and who crucially
bear the risk of losing their money if their business fails.
 Mobility of the factors of production
Occupationally mobile: capable of changing use (moving from one occupation to another).
Geographically mobile: capable of changing location (moving from one place to another).
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 be used instead to build
houses. Land is geographically immobile. It is not possible to move a section of land from Sri
Lanka to India, for example.
The mobility of labor (the ability of labor to change where it works or in which
occupation).
The mobility of labor varies. Some workers may find it difficult to move from one area of
the country to another, or from one country to another (geographical immobility), and some
may find it difficult to switch from one type of job to another type (occupational immobility).
The causes of geographical immobility include:
1. Differences in the price and availability of housing in different areas and countries.
2. Family ties.
3. Differences in educational systems in different areas and countries.
4. Lack of information.
5. Restrictions on the movement of workers.
The mobility of capital (the ability to change where capital is used or in which occupation).
It varies according to the type of capital:
1. Monetary capital is occupationally mobile and is geographically mobile.
2. Physical capital (capital goods): Some types of capital goods can be transferred easily
from one part of the country to another (occupationally mobile) whereas some capital
goods are so heavy so that it can’t be transferred easily from one part of the country to
another (occupationally immobile) like a coal mine and a dock which are fixed in
position.
The mobility of enterprise (the ability to change where enterprise is used or in which
occupation).
Enterprise moves when the people who carry out the functions move. These people
are called entrepreneurs. The mobility of enterprise depends on the mobility of entrepreneurs.
Entrepreneurs are occupationally mobile and are geographically mobile

Quantity and quality of the factors of production

Quantity of land
 The amount of physical land in
existence does not change much with
time
 Some natural resources are renewable
whilst others are non-renewable.
Quality of land
The quality of natural resources may increase
in several ways:
 Fertilizers can be applied to fields to
increase the fertility of the land.
 The purity of rivers, and so the health
of fish in the rivers, can be improved
by stopping firms polluting the rivers.

Quantity of labor Quality of labor

The quantity of labor is influenced by two The quality of labor may increase in many
key factors: ways:
 The number of workers available  better education
 The number of hours for which they  better training
work.  more experience
 better healthcare.
The number of available workers is
determined by:
1. The size of the population: The
larger the population, the more
workers there are likely to be.
2. The age structure of the population:
A country with a high proportion of
people of working age will have more
workers than a country with the same
population size, but a higher
 proportion of people who would be
too young or too elderly to work.
3. The retirement age: The higher the
retirement age, the more potential
workers there will be.
4. The school leaving age: Raising the
school leaving age would reduce the
number of workers.
5. Attitude to working women:
Countries where it is acceptable for
women to work have more workers to
draw on.
The number of hours which people work is
influenced by:
1. the length of the average working day,
for example full-time workers in the
USA tend to work for longer hours
than those in European Union
countries.
2. whether they work full or part-time,
for example more people in the UK
work part-time than those in France
3. the duration of overtime
4. the length of holidays taken by
workers
5. the amount of time lost through
sickness and illness.
 Quantity of capital
The quantity of capital is influenced by
investment
Investment: spending on capital goods.
Gross investment: total spending on capital
goods.
Depreciation: the value of capital goods that
have worn out or become obsolete.
Net investment: gross investment minus
depreciation.
Quality of capital
The quality of capital can be increased by
using more advanced technology.
Advances in technology enable capital goods
to produce a higher output and a better
quality output.

Quantity of enterprise Quality of enterprise

The quantity of enterprise is influenced by the The quality of enterprise can be improved if
number of Entrepreneurs entrepreneurs receive better education, better
training, better healthcare and gain more
experience.

Payments for factors of production

Payments are made for the use of factors of production.
1. Land receives rent
2. Labor receive wages
3. Capital receive interest
4. Entrepreneurs earn profit