HKFYG Lee Shau Kee College

C Market and Price

Book 1 Chapter 10 Factors of production
Notes

Name:___________________ Class (No.) :_______ ( ) Date:________________

Part 1: Factors of Production

i. Land (Natural Resources)

It means natural resources.
Land supply is generally fixed but not unchanged1.
The production of land does not incur cost. (i.e. gift from nature)
The use of land incurs a cost and its return is called rent.

ii. Capital (Man-made resources)

It means man-made resources used in production
It incurs production cost and its return is called interest.
Capital formation (Investment): Creation of capital goods.
The value of capital will decrease through depreciation.
Change in capital stock = Capital Formation - Capital Depreciation.

iii. Labour (Workers)

It means the physical and mental efforts people put into production.
The return of labour earns are called wages.

iv. Entrepreneurship (Boss)

It refers to the human effort by the owner of the company.
It includes risk bearing and decision making.
 Risk bearing: Loss may incur, and the return is uncertain.
 Decision making: Decision has to be made on what and how to produce, and directs and
allocates the factors of production to produce
The return of entrepreneurship earns are called profits.
Entrepreneur role is to employ (use) the other factors in the production process.

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It means it cannot be changed by human effort, but it can be changed by natural forces.
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Part 2: Labour Supply
i. Calculation of Labour Supply
Labour Supply (man hour) = Labour Force x Working Hours per Worker

Labour Force refers to people:

 who are aged 15 or above
 willing and able to work for wages.

ii. Factors Affecting Labour Supply

a. Size and Structure of the Population
population size
sex and age distribution

b. Working Incentives
wages and benefits

c. Government Policy
minimum work age
working hours
salaries tax
unemployment allowance

d. Social Customs and Practices

holidays, festival

Part 3: Labour Productivity

i. Calculation of Labour Productivity

It means the average output per unit of labour

The higher the ratio, the higher the average productivity of labour.

ii. Factors Affecting Labour Productivity

a. Education and Training (↑Edu lv.  ↑Productivity)
b. Production Technology and Management (↑Technology  ↑Productivity)
c. Rewards / career prospects(↑wages  ↑Productivity)
d. Other Factors, e.g. working environment, health, etc.

Part 4: Mobility of Labour

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i. Geographical Mobility
a. Definition
The ease (ability and willingness) of workers to move from one place to another place to work.

b. Factors Affecting Geographical Mobility

Government policies on foreign labour and immigration
Transportation network
Economic, social and political factors
Cultural differences
Market information

ii. Occupational Mobility

a. Definition
The ease (ability and willingness) of workers to change from one occupation to another.

b. Factors Affecting Occupational Mobility

Economic Restructuring
 Retraining programme is needed for laid off workers
Wage Differences
 Wage of an industry ↑  Occupational Mobility ↓ (as the cost of changing occupation is
high)
Non-monetary factors (e.g. working conditions)
Professional qualifications and license restrictions
 Entry barriers which makes a higher wage level.
Age of workers (Age ↑  Occupational Mobility ↓)

Part 5: Wage Payment Methods

i. Piece rate
Definition: - piece rate calculates wages based on the quantity of output
- in industries with large volume of output and a high degree of
standardization is suitable
Advantage:
(to employers)
 Higher working incentive of workers (work more  earn more)
 Lower cost of supervision for employers
 Flexibility on wage payment
(to workers)
 Wage payments will automatically adjust according to workers’ contribution to production.
(i.e. fair to outstanding workers)
Disadvantages:
(to employers)
 Higher cost of wage calculation since employers need to set the scope of work and price for
each piece of work.

 Higher cost of quality control (quantity instead of quality)

(to workers)
 Workers’ income is unstable.
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ii. Time rate
Definition: -it calculates wages based on the working hours of workers
-suitable for jobs which the work covers a wide scope of duties
Advantages:
(to employers)
 Lower cost of wage calculation and easy to calculate wages
 Prevent low product quality due to rushing work
(to workers)
 Workers have more stable income thus allows firms to maintain work force

Disadvantages:
(to employers)
 Difficult to raise working incentives hence supervision is needed
(to workers)
 Wages will not automatically adjust according to workers’ contribution to production (i.e.
unfair to outstanding workers)

iii. Basic salary plus commission

Definition: -a wage calculated as a certain percentage of the sales volume
-suitable for occupations related to sales
Advantages:
(to employers)
 Higher working incentive
 Save supervision cost

Disadvantages:
(to employers)
 Higher cost of quality control (quantity instead of quality)
(to workers)
 Workers’ income is unstable.

iv. Profit sharing scheme – bonus

Definition: -companies pay extra wages to staff according to the overall
performance of the company
-it is a certain percentage of the company’s profits
Advantages:
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 (to employers)
 Higher working incentive and sense of belonging
 Save supervision cost on working performance
(to workers)
 Workers can share the success of the company if the company performs well.

Disadvantages:
 Workers’ income is unstable.

v. Tips
Definition: -a gift or money paid by customers to reward workers.

Advantages:
(to employers)
 Higher working incentive to provide better services
 Lower cost of supervision for employers
(to workers)
 Workers can earn more by providing better services

Disadvantages:
(to employers)
 Extra cost in calculating wage payment
(to workers)
 Workers income is not stable.

** In reality, many companies employ staff with a wage scheme containing several payment
methods.