1.2 The factors of production

Chapter Objective:

By the end of this chapter, you will be able to able to:

> define and provide examples of the factors of production

> outline the rewards for the factors of production

> explain the influences on the mobility of factors of production

> understand the causes of changes in the quantity and quality of factors of production

Factors of Production

In order to satisfy needs and wants, we require goods and services.  In order for us to have goods and services, we need resources to them.  These resources are called factors of production. There are four types of factors of production:

Let's take the example of producing cans of Coca-Cola. The factors of production involved are:

> Capital: The factory building, machinery, computers, and trucks used to produce and transport the drinks.
> Enterprise: The business skills needed to organize and motivate workers to make Coca-Cola and run the company.
> Labour: The people working on the production line, doing administrative tasks, promoting the drinks, and managing the company.
> Land: The natural resources like sugar, water, and caffeine used to make Coca-Cola.

Rewards for Factors of Production

Each factor of production gets a reward for its contribution to the production process:
The combined rewards for all the factors of production are called income.

Mobility of Factors of Production

The mobility of factors of production refers to the extent to which resources can be changed for one another in the production process. For example, farming can be very traditional in some parts of the world and rely heavily on labour resources. However, in other countries, farming is predominantly mechanised, with a heavy reliance of capital resources.

Economists usually talk about labour mobility, although factor mobility can apply to any factor of production. For example:

» Land might be used for various competing purposes, such as to grow certain fruits and/or vegetables, or to construct buildings such as housing, hospitals or schools.

» Capital equipment might be used for different purposes too. For example, the same machinery in the Coca-Cola factory can be used to produce Coca-Cola, Sprite and/or Fanta.

» Entrepreneurs can also be mobile. For example, Meg Whitman, chief executive offi cer (CEO) of Hewlett-Packard, was previously a vice president of the Walt Disney Company and CEO of eBay.

Labour mobility can be broken down into two categories.

Causes of changes in the quantity and quality of factors of production

Changes in the quantity and quality of factors of production can happen due to various reasons:

> Changes in costs of production, like higher labor costs affecting the demand for labor.
> Government policies, like taxes and subsidies, can impact production costs and output.
> Technological advancements can lead to more production and lower costs.
> Population changes, like migration, affect the quantity of labor in an economy.
> Improvements in education and healthcare can boost the quality of labor.
> Weather conditions can affect agricultural output.

Understanding these factors helps us see how goods and services are made and how our choices impact the economy.

Chapter Review Questions