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Study notes

Factors of Production

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

This study note focuses on the main factors of production - i.e. inputs used in the supply of goods and services

Factors of Production and Factor Rewards - revision video
Factors of production are the inputs available to supply goods and services in an economy.

Land:

  • Land includes all natural physical resources – e.g. fertile farm land, the benefits from a temperate climate or the harnessing of wind power and solar power and other forms of renewable energy.
  • Some nations are richly endowed with natural resources and then specialise in the their extraction and production – for example – the high productivity of the vast expanse of farm land in the United States and the oil sands in Alberta, Canada. Other countries such as Japan are heavily reliant on importing these resources.

Labour:

  • Labour is the human input into production e.g. the supply of workers available and their productivity
  • An increase in the size and the quality of the labour force is vital if a country wants to achieve growth. In recent years the issue of the migration of labour has become important. Can migrant workers help to solve labour shortages? What are the long-term effects on the countries who suffer a drain or loss of workers through migration?

Capital:

  • Capital goods are used to produce other consumer goods and services in the future
  • Fixed capital includes machinery, equipment, new technology, factories and other buildings
  • Working capital means stocks of finished and semi-finished goods (or components) that will be either consumed in the near future or will be made into consumer goods
  • New items of capital machinery, buildings or technology are used to boost the productivity of labour. For example, improved technology in farming has vastly increased productivity and allowed millions of people to move from working on the land into more valuable jobs in other industries.

Infrastructure – a crucial type of capital

Examples of infrastructure include road & rail networks; airports & docks; telecommunications e.g. cables and satellites to enable web access.

The World Bank regards infrastructure as an essential pillar for economic growth in developing countries. India is often cited as a country whose growth prospects are being limited by weaknesses in national infrastructure.

Entrepreneurship

  • Regarded by some as a specialised form of labour input
  • An entrepreneur is an individual who supplies products to a market to make a profit
  • Entrepreneurs will usually invest their own financial capital in a business and take on the risks. Their main reward is the profit made from running the business

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