1.

2 Factors of Production

Learning Outcomes:

• Definitions and examples of land, labour, capital and enterprise. Examples of the nature of each
factor of production.
• The influences on the mobility of the various factors.
• The causes of changes in the quantity and quality of the various factors.

1.2.1. FACTORS OF PRODUCTION AND THEIR REWARDS

Factors of production are resources used to make goods and services. They can be classified under
four main categories: land, labour, capital, and enterprise.
Factor of Production Definition Example Reward
Land natural resources extracted (e.g. oil, coal, minerals, Rent
from the environment animals)
Labour human resources or physical (e.g. factory workers, bus Wages
efforts that employees drivers, salespeople,
provide teachers)
Capital man-made resources humans (e.g. computers, tractors, Interest
produce which help to further engines, hammers)
produce other goods and
services
Enterprise knowledge and skills of an Profit
entrepreneur of how to
organize resources in a firm
and take risks in a profitable
manner

Think of factors of production as the inputs while goods and services are outputs.
Figure 1.2.1: Input-Output Model of Production

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Exercise 1.2.1: Land, Labour, Capital or Enterprise?
Using the spaces provided, identify which factor of production is shown in each of the following pictures.

Exercise 1.2.2: Cakes by Hernandez

Read the following passage and answer the questions that follow.
Maria and Marco Hernandez own a bakery called Cakes by Hernandez in El Paso, Texas. They started the
business in 2003 and are now thinking of opening a second bakery in Dallas, Texas. The Hernandez family
started their business with three employees, a baker, cashier and cleaner. They only use organic flour, sugar,
eggs and salt to make their cakes.
The decision to open a new store is a difficult one for Maria and Marco. The store in El Paso is small and often
times customers have to wait up to 45 minutes to get a seat. It also needs a new oven, mixers and a larger
refrigerator. Further, the store could be expanded to make more cakes and serve more customers if Maria
and Marco rent the store that is next to their current store. However, if the couple decides to open a new
branch in Dallas, they could gain access to a new source of customers and could spread their reputation to
another area of Texas.
They don’t have the money to open a new store and expand the existing store.
List examples of the factors of production in the appropriate boxes below.

Factor of Production Example(s) from the passage

Land
Labour
Capital
Enterprise

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1.2.2. MOBILITY OF THE FACTORS OF PRODUCTION
Factors of production needs to be transferred away from inefficient industries to those that are more
economically efficient in order to generate more income. This transfer or movement of factor of
production from one industry to another is referred to as the mobility of factors of production.
There are two types of mobility of factors of production:

Mobility Definition Causes

Geographic The ability to move • Transport: Improvements in transportation links
Mobility factors of production allows for easier movements.
(except land) from one • Linguistic ability: workers that can speak multiple
location to another. languages fluently can more easily move to work
in another countries.
• Housing: if rented accommodation is available
and affordable, it will be easier to move.
Occupational The ability to move •
Education/skills: some occupations require
Mobility factors of production special skills (e.g. doctors) therefore more
from one occupation to educated workers have greater mobility.
another. • Wages: if the current occupation pays well, then
the workers are less likely to move.
• Trade Union Restrictions: some trade unions may
require that employees meet a certain
requirement prior to entering an industry
therefore reducing mobility.
Note that both geographic and occupational mobility primarily describes the mobility of labour.
Capital, when compared to labour, has less mobility. Nevertheless capital can certainly be used to
produce different types of goods and services. Therefore capital has some degree of mobility.
Land, by contrast, has no mobility. We cannot shift a piece of land to another area. However, the
output coming from land (e.g. wood, plants) may be moved to other areas. Therefore the factor of
production, land, also has some degree of mobility.
In conclusion, all factors of production have mobility to some extent. This mobility allows for the
introduction of new techniques and increased productive efficiency in different industries.

Exercise 1.2.3: Mobility of Factors of Production

Mark is a former police officer in Singapore. He will be moving to Shanghai and become an Economics teacher
over there.
1. Explain two factors that may influence labour mobility between jobs. [4]
One factor that may influence the mobility of labour is education. If workers are more educated and skilled,
they can more likely move to other occupations that have a higher skill requirement.

Another factor that may influence labour mobility is __________________. If ________________________

_____________________________________________________ then _______________________________
______________________________________________________________.

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1.2.3. QUANTITY AND QUALITY OF THE FACTORS OF PRODUCTION
Improvements in the quality and quantity of factors of production are directly responsible for
economic growth.
Several factors influencing the quality and quantity of factors of production may include:
• Education and Training: with more education and training, labour becomes more skilled and
therefore more productive in producing goods and services.
• Foreign direct investment: investments by foreign countries can be used to improve local
production facilities and equip them with the latest and most efficient production technology.
• Research and development: R&D allows for the development of modern technology for use
in the production process.
• Birth rates: birth rate of a population determine the supply of labour available.
• Immigration policies: immigration policies that are in favour of welcoming skilled foreign
workers would result in an increased supply and quality of labour.

Exercise 1.2.4: Multiple Choice

1. Which of the following would not improve the quality of factors of production?
A. Education subsidies
B. Technology
C. Strict immigration policies
D. Reducing school-leaving age

2. Which of the following factors of production is least likely to increase in supply?

A. Land
B. Labour
C. Capital
D. Entperprise

Master Your Definitions

Production: the process of using resources to make and sell goods and services to satisfy our demands.

Factors of Production: resources used to make goods and services, which includes land, labour, capital, and enterprise.

Land: natural resources extracted from the environment (e.g. oil, coal, minerals, animals).

Labour: human resources or physical efforts that employees provide (e.g. factory workers, bus drivers, salespeople,
teachers).

Capital: man-made resources humans produce which help to further produce other goods and services (e.g. computers,
tractors, engines, hammers).

Enterprise: knowledge and skills of how to organize resources in a firm and take risks in a profitable manner.