MGTA05 – Foundations – Week 3

The Factors of Production

Please read Chapter 3

Updated: 20 September 2021

5:30 am

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 Factors of Production

There are basic building blocks

used to produce anything
In business, the building blocks are:

“factors of production”
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 MGTA05 – Factors

natural
resources
raw materials found in ground, grown
from earth, or harvested from nature
Examples: coal, wheat, water, wood
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 MGTA05 – Factors

labour
Businesses
need people
labour = workers, human beings

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 MGTA05 – Factors

capital
money
or

the machines and technologies

that money can buy
Examples: tractors, hammers, printers, phones

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A Business Combines the Factors
.

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 A Theory Evolves

Theory:

“An attempt to explain something

complicated, hard to understand,
or hard to prove”

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The Fourth Factor: Entrepreneurs
Businesses are formed by people
People motivated to take time, incur costs
and take risks, to make something happen

“entrepreneurs”
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 Entrepeneurs
.

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 Why Care About Factors?

If you understand the parts,

you will better understand the whole

Quantity, quality, and cost of factors

determine
quality, quantity and cost of products

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 Factor Intensity
Theory suggests that all businesses
need some combination of all three

However, depending on the business or

industry one factor may be more
important than the others

Called “Factor Intensity”

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 “Labour Intensive” Business
A business that relies heavily or primarily
on labour
Employer Employees

Walmart 2.1 million

McDonald's 1.9 million
Indian Railways 1.4 million
Success will depend upon: the quantity and
quality of workers the business can hire

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“Resource Intensive” Business
A business that relies heavily or primarily
on natural resources

farming, fishing, forestry, mining

These depend on natural resources
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“Capital Intensive” Business
A business that relies on lots of
money, equipment and technology

banking, auto manufacturing

These businesses depend on capital
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Factor Substitution
Substituting one factor

for another

So products can be made:

Faster or better
More effectively
More cheaply
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 Factor Substitution
This 1 machine can do the work of 50 men

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 Factor Substitution
This 1 can do the 200+
machine work of women

the “spinning jenny”

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 The Industrial Revolution
Concentrated period of mechanical and
industrial invention and discovery
(most of it, labour saving)

transformed the industries of the age

(with far reaching consequences) 18
Industrial Revolution: Consequences
Bigger, more sophisticated machinery and
equipment (Capital more important)
Less work done by hand (Labour less important)
Fewer jobs done at home (“Factory” system)
More produced = more to consume
Increase in material prosperity
Decrease in quality of life? Less autonomy?
Decline of rural population + growth of cities
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 The Industrial Revolution
Rapid economic growth in Europe
began in Britain – second half of 18th C

n
l uti o
Revo
i a l
ustr
Ind

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 The Information Revolution
This software can deliver more than 200 men

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 The Information Revolution
Once again...
A concentrated period of invention and
discovery which transformed the most
important industries of the age

Agricultural revolution ~3000 B.C.

Industrial revolution 18 - 19 centuries
th th

Information revolution 20 - 21 centuries

th st

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 The Information Revolution
X Invention or innovation Year of discovery
internet 1969
microprocessor chip 1971
e-mail 1971
cell phone 1973
laptop computer 1981
digital camera 1988
World Wide Web 1989
Webcam 1991
Smartphone 1992
 The Information Revolution
. Name
Product/
Industry
Year Location Revenue Employees

Intel microchips 1968 California, USA $60 bn 106,000

Microsoft software 1975 New Mexico, USA $85 bn 114,000
Apple hardware 1976 Washington, USA $216 bn 115,000
Oracle software 1977 California, USA $37 bn 136,000
Dell hardware 1984 Texas, USA $61 bn 102,000
Amazon e-commerce 1994 Washington, USA $136 bn 341,000
Alphabet search engine 1998 California, USA $90 bn 74,000
Facebook social network 2004 California, USA $28 bn 19,000
E-Bay e-commerce 2005 California, USA $9 bn 12,600
 The Information Revolution
Is there – in fact – a fifth factor of production?
information
? ?
? ?

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 Factors: Conclusion
A business is made from basic elements:
Natural Resources
Labour
Capital
These are organised and assembled by:
Entrepreneurs
Understanding what each does,
allows you to better manage the whole
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