Economics / Unit 1: Scarcity, Choices and Opportunity Cost
1.2 Factors of Production
Notes
Producers combine four factors of production to make goods and services.
| Factor | Meaning | Example | Payment to owner |
|---|---|---|---|
| Land | natural resources | water, oil, soil, timber | rent |
| Labor | human effort | a nurse's work | wages |
| Capital | human-made tools used to produce other goods | ovens, trucks, computers | interest |
| Entrepreneurship | risk-taking and initiative to start a business | founding an app company | profit |
- Physical capital is equipment and buildings. Human capital is the knowledge and skills workers gain through education, training and experience.
- In economics, "capital" means tools of production, not money itself.
- Productivity is output per unit of input. Better capital, training and technology raise productivity.
- Worked example: a worker who makes 40 pairs of shoes in 8 hours has a productivity of $\displaystyle \frac{40}{8} = 5$ pairs per hour. New machines that raise output to 64 pairs in 8 hours raise productivity to 8 pairs per hour.
Practice
A bakery's ovens are an example of which factor of production?
Ovens are human-made tools used to produce other goods.
A student takes a welding course to earn a certificate. She is investing in:
Skills and knowledge gained through education and training are human capital.
A factory makes 600 phone cases in 10 hours. After training, it makes 750 in the same 10 hours. By how much did productivity rise?
Productivity rose from $\displaystyle \frac{600}{10} = 60$ to $\displaystyle \frac{750}{10} = 75$ cases per hour, an increase of 15.
Ready for more? Take the Unit 1 test.