Factors of production
Zuri Wambua runs Asali Honey, a sole trader business in country X. She keeps 60 hives on a field she rents from a farmer, employs one part-time helper and spins the honey out of the combs by hand.
Orders from local shops have doubled, and Zuri has a choice: hire a second helper for $400 a month, or spend $3,000 on an electric honey extractor.
Both options answer the same question: which inputs should the business use?
Economists call these inputs the factors of production.
Every business, from a market stall to a car maker, combines four of them to make a good or provide a service.
Factor
What it is
What it contributes at Asali Honey
Land
natural resources: ground, water, minerals, plants and animals
the field for the hives and the flowers the bees feed on
Labour
the physical and mental effort of people at work
the helper checking hives, cutting combs and filling jars
Capital
goods made by people that are used to produce other goods and services: tools, machines, buildings, vehicles
the hives, protective suits, the delivery van, the extractor Zuri may buy
Enterprise
the skill and willingness to take risks, bring the other three factors together and make the decisions
Zuri deciding what to produce, finding shops to sell to and risking her own savings
Two points catch students out.
First, in a factors-of-production answer capital means equipment, not money: the $3,000 is not the capital, the extractor it buys is.
Second, enterprise is the factor that decides.
Land, labour and capital do nothing until someone organises them and accepts the risk that the product will not sell.
That person is the entrepreneur (section 6).
Factors can be swapped for each other
Many business decisions are really a choice between factors.
Zuri can produce more honey with more labour or with more capital, but each choice affects her costs, her cash and her flexibility differently.
Choice
Effect on costs and cash
Matters most when ...
Hire a second helper (labour)
$400 every month, but no large payment now
demand may fall again, because the job can end; the helper can also deliver, check hives and serve customers
Buy the extractor (capital)
$3,000 now, then only electricity and repairs
demand is expected to stay high, because the machine keeps working for years and does one task faster and more evenly
The factors must also fit together.
An extractor is useless without enough hives (land and capital) to fill it, and more hives need more labour to look after them.
Adding one factor while another is short gives less extra output than the owner hopes.
- Factors of production: the resources a business combines to produce goods or services, namely land, labour, capital and enterprise.
- Land: all natural resources used in production, such as the ground, water, minerals, forests and animals.
- Labour: the physical and mental effort that people put into producing goods and services.
- Capital: goods made by people, such as machines, tools, vehicles and buildings, that are used to produce other goods and services.
- Enterprise: the skill and risk-taking of a person who brings the other factors of production together and makes the business decisions.
Outline two factors of production that Asali Honey uses. [4]
Strong answer. Land is a natural resource [k]: Asali needs the rented field and the flowers around it so that its 60 hives can produce honey [app].
Capital is equipment made by people [k]: Zuri's hives, protective suits and delivery van let the business collect honey and get the jars to the shops [app].
(2 [k] + 2 [app] = 4)
Weaker answer. "Labour and capital.
Labour is workers and capital is money."
Labour earns [k] but nothing links it to Asali; "capital is money" is wrong for this topic.
1 mark of 4.
Explain one advantage and one disadvantage for Asali Honey of buying the extractor instead of hiring a second helper. [6]
Advantage. A machine does the same task faster and at a steady standard [k].
Zuri now spins every comb by hand, so the extractor would cut the time spent on extraction [app].
That frees hours for her to look after more hives and visit more shops, so output and sales can rise to meet the doubled orders [an].
Disadvantage. The machine needs a large payment at the start [k].
Asali is a sole trader, so the $3,000 must come from Zuri's savings or a loan [app].
That cash is then not available for jars and labels, and if orders fall back, Zuri still has paid for a machine that stands idle, while a helper's job could simply end [an].
(2 [k] + 2 [app] + 2 [an] = 6.)
What a weaker answer lacks: "Machines are faster.
Machines are expensive."
These are two points of knowledge, with no fact about Asali and no consequence for its output, cash or sales: 2 marks.
Name the factor, then say what it does for this business.
"Capital: the van that delivers jars to the shops" is applied; "capital is needed to produce goods" is not.
In a factors answer, never use capital to mean money.
- Writing that capital is "money to start the business". In the factors of production, capital is equipment made by people, such as machines, tools and vehicles.
- Thinking land means only the ground. It is every natural resource, including water, fish, timber and the soil a farm depends on.
- Calling enterprise "the business itself". Enterprise is a person's risk-taking and organising, which turns the other three factors into a working business.
- Treating labour and capital as fixed. A business can swap one for the other, and the choice changes its costs, cash flow and flexibility.
Check your understanding
1. Identify two factors of production other than labour. [Recall] [2]
2. Define enterprise. [Recall] [2]
3. Asali Honey plans to make beeswax lip balm from the wax left after extraction. Outline two factors of production it will need for the lip balm. [Apply] [4]
4. Zuri's helper is leaving, and orders have doubled. Explain two reasons why Zuri's enterprise is important to the success of Asali Honey. [Analyse] [6]
Answers
1. Any two of: land [1]; capital [1]; enterprise [1]. Only the first two answers count.
2. The skill and willingness to take risks [1] by bringing the other factors of production together and making the business decisions [1].
3. Labour is human effort [k]: someone has to melt the beeswax, mix it with oils and fill the small tins [app]. Capital is equipment made by people [k]: Asali will need a pan or melter and moulds to turn the leftover wax into lip balm [app]. Land (the beeswax itself and plant oils as natural resources) is also accepted. (2 [k] + 2 [app] = 4)
4. Enterprise means taking risks [k]: Zuri must decide whether to spend $3,000 of her own money on an extractor [app], and a good decision lets Asali meet the doubled orders without wasting cash [an]. Enterprise also means organising the other factors [k]: with the helper leaving, Zuri must find and train a replacement or change how the work is done [app], otherwise hives go unchecked, output falls and the shops may turn to another supplier [an]. (2 [k] + 2 [app] + 2 [an] = 6)