The Factors of Production

The four factors

Factors of production are the resources used to produce goods and services.

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Two points examiners test directly:

• Capital does not mean money. Money is used to buy capital, but it does not produce anything by itself. A delivery van is capital; the cash in the bank account is not.
• Enterprise is a separate factor. The entrepreneur does two distinct jobs: combining the other factors, and bearing the risk of losing money if the business fails. That risk is why the reward is profit rather than a wage.

Human capital

Human capital is the skills, knowledge, experience and health of workers. It is not a fifth factor; it is the quality of labour.

It matters because raising human capital through education, training and healthcare makes each worker more productive. That is why so many government policies in Unit 4 focus on education and training: it is one of the few things that raises what a country can produce in the long run.

Mobility of the factors of production

Mobility means how easily a factor can be moved. There are two kinds, and the exam expects both.

Occupational mobility, how easily a factor can be switched to a different use.

• Labour: a teacher retraining as an accountant. Limited by skills and qualifications.
• Capital: a van can deliver almost anything (mobile), but a printing press can only print (immobile).
• Land: a field can grow crops or hold a factory (fairly mobile in use).

Geographical mobility, how easily a factor can be moved to a different place.

• Labour: moving city for work. Limited by housing costs, family ties, language, and immigration rules.
• Capital: a laptop moves easily; a steel mill does not.
• Land: geographically immobile; you cannot move a field. This is the clearest example in the topic.

Why mobility matters. When labour is occupationally immobile, workers made redundant in a declining industry cannot take the jobs available in a growing one. The result is structural unemployment (Unit 4.7). Low mobility therefore causes unemployment even when vacancies exist.

What influences demand for and supply of factors

Demand for a factor is derived demand, firms want it not for itself, but for what it can produce. If demand for houses rises, demand for builders and bricks rises with it.

Worked example

A car factory closes in a town where most workers were trained only in car assembly.

1. The workers are occupationally immobile, their skills do not transfer to the jobs available nearby
2. they are also geographically immobile if housing elsewhere is too expensive
3. so vacancies in other regions go unfilled while these workers stay unemployed
4. this is structural unemployment.

What would help. Government retraining raises occupational mobility, and help with relocation costs raises geographical mobility. Both take time, which is why structural unemployment is long-term.

Common exam mistakes

• Saying capital means money.
• Forgetting enterprise, or confusing it with labour. The difference is risk.
• Giving the wrong reward, matching land to rent, labour to wages, capital to interest, enterprise to profit.
• Confusing occupational with geographical mobility.
• Treating human capital as a fifth factor rather than the quality of labour.

Exam technique

If asked for a factor of production, name it and give an example from the context in the question. "Land, the farmland the business uses" scores better than "land".

For mobility questions, always say which type you mean, and give the reason it is limited, skills for occupational, housing or family for geographical.

Remember that demand for factors is derived, so any question about why demand for workers changed usually starts with a change in demand for the product.

Building an answer

4 marks, "Explain, with examples, two factors of production used by a bakery."

Capital is the man-made equipment used to produce: the ovens, mixers and delivery vans. Its reward is interest.
Labour is the human effort: the bakers and counter staff. Its reward is wages.

Give the factor, an example rooted in the context, and the reward. All three are creditable.

6 marks, "Analyse how an improvement in the quality of labour affects an economy."

Better education and training raise human capital, so each worker produces more per hour, productivity rises.
Higher productivity lowers the cost per unit of output, which allows firms to cut prices or raise profits and invest.
Because the economy can produce more from the same resources, the production possibility curve shifts outward and potential output rises.
Higher-skilled workers also command higher wages, so incomes and living standards rise, though the gains take years to appear, since education is a long-run investment.

The four factors, their rewards and their mobility

Occupational mobility is the ability to move between uses; geographical mobility is the ability to move between places. Examiners frequently ask which is limiting, and the answer for labour is usually both, retraining is slow and housing costs restrict moving.

A real case to quote

Germany's dual apprenticeship system. Around half of school leavers train through combined classroom and workplace apprenticeships, which is widely credited with the productivity and low youth unemployment of German manufacturing. It is the clearest available demonstration that labour is not simply a quantity, its quality is a policy choice with measurable results.

Quick revision

• Land → rent. Labour → wages. Capital → interest. Enterprise → profit.
• Capital = man-made items used in production, not money.
• Enterprise organises the other factors and bears the risk.
• Human capital = the skills and health of workers (quality of labour).
• Occupational mobility = changing use. Geographical mobility = changing place.
• Land is geographically immobile.
• Low occupational mobility causes structural unemployment.
• Demand for factors is derived from demand for the product.

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