Republic of the Philippines

CAPIZ STATE UNIVERSITY

MAIN CAMPUS
Fuentes Drive, Roxas City, Capiz
Tel: No. (036) 6214-578

Reporter: Professor:
Nizel C. Baes Dr. Carmelino Villanueva

FACTORS OF PRODUCTION

Factors of production are the resources people use to produce goods and services; they
are the building blocks of the economy. Economists divide the factors of production into four
categories: land, labor, capital, and entrepreneurship.

LAND
The first factor of production is land, but this includes any natural resource used to
produce goods and services. This includes not just land, but anything that comes from the land.
Some common land or natural resources are water, oil, copper, natural gas, coal, and forests.
Land resources are the raw materials in the production process. These resources can be
renewable, such as forests, or nonrenewable such as oil or natural gas. The income that
resource owners earn in return for land resources is called rent. 

LABOR

The second factor of production is labor. Labor is the effort that people contribute to the
production of goods and services. The income earned by labor resources is called wages and is
the largest source of income for most people. 

CAPITAL

The third factor of production is capital. Think of capital as the machinery, tools and
buildings humans use to produce goods and services. An increase in capital goods means an
increase in the productive capacity of the economy. The income earned by owners of capital
resources is interest. 

ENTREPRENEURSHIP

The fourth factor of production is entrepreneurship. An entrepreneur is a person who

combines the other factors of production - land, labor, and capital - to earn a profit. The most
successful entrepreneurs are innovators who find new ways produce goods and services or who
develop new goods and services to bring to market. Without the entrepreneur combining land,
labor, and capital in new ways, many of the innovations we see around us would not exist.
Entrepreneurs thrive in economies where they have the freedom to start businesses and buy
resources freely. The payment to entrepreneurship is profit. 

Remember, goods and services are scarce because the factors of production used to
produce them are scarce. In case you have forgotten, scarcity is described as limited quantities of
resources to meet unlimited wants.

COST OF PRODUCTION
Production costs refer to the costs incurred by a business when manufacturing a good or
providing a service. Production costs include a variety of expenses, such as labor, raw materials,
consumable manufacturing supplies, and general overhead. Additionally, taxes levied by the
government or royalties owed by natural resource extracting companies are also considered
production costs.

Types of costs
Fixed Costs
Fixed costs are costs that don’t change with the quantity of output produced. That is, they
have to be paid even if there is no production output at all.

For example, if you want to open a burger restaurant, you will need to pay rent for your
location. Let’s say USD 1,000 per month. This is a fixed cost, because it does not matter if and
how many burgers you sell, you will still have to pay rent. Similarly you’ll have to pay your
waitress’ salary, regardless of the quantity of burgers she serves. If she earns USD 1,000 per
month, your total fixed costs add up to USD 2,000 per month.

Variable costs
Variable costs are costs that change with the quantity of output produced. That is, they
usually increase as output increases and vice versa. Unlike fixed costs, variable costs are not
incurred if there is no production. Therefore, they are usually reported per unit.

For example, in the case of your imaginary burger restaurant, the costs of meat, burger
buns, lettuce, and BBQ sauce would be considered variable costs. Let’s assume all ingredients
add up to USD 5 per burger. If you sell 20 burgers and your only variable costs are the costs of
the ingredients, your total variable costs result in USD 100. By contrast, if you sell 200 burgers,
your total variable costs add up to USD 1,000. If you don’t sell any burgers at all, your total
variable costs are zero. Simply put, you don’t have to buy buns if you are not going to serve any
burgers.

Total cost
Total cost describes the sum of total fixed costs and total variable costs. It includes all
costs that are incurred during the production process. Again, let’s say you managed to sell 200
burgers in your first month. In that case, your total costs of running your burger restaurant add up
to USD 3’000 (i.e. USD 2,000 fixed costs + USD 1,000 variable costs).

Variable costs are costs that change with the quantity of output produced. Total costs
are the sum of total fixed costs and total variable costs. Meanwhile, average costs are the total
costs divided by the quantity of output produced and marginal costs are the costs of producing
one more unit of output.

LAW OF DEMAND & LAW OF SUPPLY

Supply and demand is perhaps one of the most fundamental concepts of economics and it
is the backbone of a market economy. 

Demand 
Demand refers to how much (quantity) of a product or service is desired by buyers. The
quantity demanded is the amount of a product people are willing to buy at a certain price; the
relationship between price and quantity demanded is known as the demand relationship.

Supply

Supply represents how much the market can offer. The quantity supplied refers to the
amount of a certain good producers are willing to supply when receiving a certain price. The
correlation between price and how much of a good or service is supplied to the market is known
as the supply relationship. Price, therefore, is a reflection of supply and demand.

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a
good, the less people will demand that good. In other words, the higher the price, the lower the
quantity demanded. The amount of a good that buyers purchase at a higher price is less because
as the price of a good goes up, so does the opportunity cost of buying that good. As a result,
people will naturally avoid buying a product that will force them to forgo the consumption of
something else they value more

The Law of Supply 

Like the law of demand, the law of supply demonstrates the quantities that will be sold
at a certain price. But unlike the law of demand, the supply relationship shows an upward slope.
This means that the higher the price, the higher the quantity supplied. Producers supply more at a
higher price because selling a higher quantity at a higher price increases revenue.

Time and Supply

Unlike the demand relationship, however, the supply relationship is a factor of time.
Time is important to supply because suppliers must, but cannot always, react quickly to a change
in demand or price. So it is important to try and determine whether a price change that is caused
by demand will be temporary or permanent.

Equilibrium
When supply and demand are equal (i.e. when the supply function and demand function
intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its
most efficient because the amount of goods being supplied is exactly the same as the amount of
goods being demanded.