LC Economics www.thebusinessguys.

ie©

Factors of Produc-on

The scarce produc:ve resources of an economy can be placed into one of

the four following headings.
1) LAND
2) LABOUR
3) CAPITAL
4) ENTERPRISE
The Factors of Produc-on: are those resources that are used in the
produc:on of goods and services
In general terms, Factors of Produc:on are the “stuff” used to make
“things”.
E.g. these wonderful notes that you are reading required some
combina:on of all four factors of produc:on to be made.
1) Land: They were typed up in my apartment.
2) Labour: The countless hours that I spent typing them were, of course,
a pleasure but also an example of labour.
3) Capital: The laptop that I am using right now to type them and
subsequently the internet domain on which they will be stored.
4) Enterprise: The ingenious idea that I had in the first place to create
these notes and sell them in the marketplace (for grinds).
Enterprise is said to be the factor of produc:on that combines the other
factors of produc:on in order to produce goods and services. It is for this
reason that most economists believe enterprise to be the most important
factor of produc:on.
There are markets for these factors of produc:on where they can be
bought (demanded) and sold (supplied).
Such markets are called Factor Markets.
Factor Markets: are markets where the factors of produc:on are
demanded and supplied.
E.g. The Labour Market

Jonathan Traynor
 LC Economics www.thebusinessguys.ie©

Like all free markets, the price for each of the factors of produc:on
depends on the demand and supply for that factor. In equilibrium, the
quan:ty demanded of a factor of produc:on equals the quan:ty
supplied of that factor of produc:on. Also the price received by that
factor of produc:on (which of course is equal to the price paid to that
factor of produc:on) is the payment that the factor receives for his
contribu:on to the produc:on process. See Diagram Below.

The Demand and Supply for Labour (or any Factor of Produc-on)

W S

WL

QL Quan:ty of Workers
Employed
In the diagram above we have the Demand for Labour (downward sloping
from leY to right, showing that as wages falls employers are inclined to
hire more workers as labour has become rela:vely cheaper) and the
Supply of Labour (upward sloping from leY to right showing that workers
are more willing to work at higher wage rates.)
QL is the quan:ty of man hours that employees are paid by their
employer to work and WL is the wage that the workers receives per hour.
Even though we have used the example of the labour market in this
diagram, the same mechanism (the intersec:on of demand and supply)
brings each factor market into equilibrium.
Jonathan Traynor 2
LC Economics www.thebusinessguys.ie©

Back to Factor Markets

We have just seen that it is the intersec:on of the demand for a factor of
produc:on and the supply of a factor of produc:on that bring each factor
market into equilibrium. The factor’s equilibrium price represents the
amount of money the owner of each factor of produc:on gets per hour it
is used (the owners of Labour are paid a wage, the owners of Capital are
paid interest etc) in the produc:on process. The factor’s equilibrium
quan:ty tells us how many hours this factor will be used in the
produc:on process.
The markets for factors of produc:on do however; have one defining
quality that makes them different from other markets.
The demand for a factor of produc:on is said to be a derived demand.
Derived Demand: refers to the fact that a factor of produc:on is
demanded for its contribu:on to the produc:on process.
This idea might best be explained by way of an example.
E.g. A builder does not demand bricks because he considers them to be
beau:ful, that is, not for their own sake. He buys them because he can
use these bricks to make houses and sell these houses to make a profit.
This is the idea of derived demand, the demand for a factor of produc:on
because it can be used to make something else for which there is a
demand. That is the demand for a factor of produc:on is derived from
the demand for the goods and services that they produce. A rise in the
demand for houses causes a rise in the demand for those factors of
produc:on that produce houses (Builders, :mber, concrete etc).
The price, which will be paid in order to acquire a factor (in the case of
labour the wage that a worker receives per hour), depends on the extra
revenue that the firm will earn through employing that factor. If the firm
can sell what the worker produces for a lot of money then the worker will
be paid a lot of money. If the price of houses go up, builders will be paid
more money per hour.
So far we should realise that it is the intersec:on of the demand for
Labour and the supply of Labour that tells us how much workers earn and
how many hours will be worked in an economy (Macroeconomics). The
ques:on that we now must answer is “how many workers will an
individual firm choose to hire?” (Microeconomics).
To answer that ques:on we need to look at a few different terms. We are
assuming a Perfectly Compe::ve Firm and a Perfectly Compe::ve
Labour Market. In short we are assuming that the firm can con:nue to
hire new workers without having to increase the wage rate.
Jonathan Traynor 3
 LC Economics www.thebusinessguys.ie©

Marginal Produc-vity Theory

In order to answer the ques:on of “how many units of each factor of
produc:on an individual firm will hire?, we must understand the idea of
Marginal Produc:vity Theory. There are three essen:al concepts that we
will now discuss.
1) Marginal Physical Product (MPP)
2) Marginal Revenue Product (MRP)
3) Marginal Revenue (MR)
The first concept that we must deal with is Marginal Physical Product.
Marginal Physical Product (MPP): is the extra output produced when
an addi:onal unit of a factor of produc:on is employed.
I.e. it is the amount of extra physical stuff that is made from employing
one extra unit of a factor of produc:on. This could be an extra worker,
another machine, another acre of land etc.
Marginal Physical Product (MPP) Curve

MPP
!

MPP

Quan:ty of the
Factor of Produc:on

Jonathan Traynor 4
LC Economics www.thebusinessguys.ie©

The shape of the Marginal Physical Product (MPP) curve slopes upward
ini:ally as extra factors of produc:on are hired and then slopes
downward aYer that, as extra factors of produc:on are hired.
This means that a firm with only a few workers, as this firm hires more
workers, the amount of extra “stuff” that each worker produces increases
as more workers are hired. This happens up to a point. AYer this point, as
the firm hires more workers, the extra “stuff” that each worker produces
begins to fall again. Look at the table below

Number of Total Output Marginal Physical

Workers (Computers) Product (MPP)

1 6 6

2 16 10

3 31 15

4 56 25

5 86 30

6 106 20

7 124 18

8 140 16

9 154 14

10 166 12

Looking at the table above ini:ally, as more workers are hired, the extra
output that each worker is responsible for (MPP) increases. We can see
this by looking at the MPP from worker 1 up to and including worker 5.
The MPP for each of these workers is bigger than the previous worker.
Then from worker 6 and beyond, the extra output that each individual
worker is responsible for (MPP) is falling.
The reasons that the MPP curve slopes upward and then downward are
the exact same reasons as the shape of the MC curve. A rise in
produc:vity always accompanies a fall in costs and a fall in produc:vity
accompanies a rise in costs. They are opposite sides of the same coin.
Jonathan Traynor 5
LC Economics www.thebusinessguys.ie©

The Shape of the Marginal Physical Product Curve

1) Ini:ally, the MPP curves slopes upward due to the greater returns
from the increased degree of specialisa:on of each factor of
produc:on.
2) The MPP curves starts to slope downwards again due to the Law of
Diminishing Marginal Returns which states that as extra units of a
variable factor of produc:on are added to a set sized fixed factor of
produc:on, eventually a point will be reached when the extra output
caused by the last unit of the variable factor of produc:on employed
begins to decline.
Now on to our next defini:on.
Marginal Revenue Product (MRP): is the extra revenue earned when an
addi:onal unit of a factor of produc:on is employed.
I.e. it is the extra money that a firm earns from employing an extra unit of
a factor of produc:on. I.e. The extra revenue a firm receives from
employing one more worker.
To mathema:cally calculate the Marginal Revenue Product, it might seem
obvious to just mul:ply the MPP X Price. This works great for Perfect
Compe::on as a firm can sell all it produces at the market price and does
not have to lower price in order to sell more goods. See Below.
EXAMPLE: Calculate the MRP for each worker that is employed in a
Perfectly Compe::ve Firm.

Marginal Marginal
Number
Total Physical Revenue
of Price
Output Product Product
Workers
(MPP) (MRP)
0 0 - 10 -

1 10 10 10 ?

2 22 12 10 ?

3 32 10 10 ?

4 40 8 10 ?

5 45 5 10 ?

Jonathan Traynor 6
LC Economics www.thebusinessguys.ie©

ANSWER:

Marginal Marginal
Number
Total Physical Revenue
of Price
Output Product Product
Workers
(MPP) (MRP)
0 0 - 10 -

1 10 10 10 100

2 22 12 10 120

3 32 10 10 100

4 40 8 10 80

5 45 5 10 50

This is the correct method to calculate MRP for a factor of produc:on

working in a Perfectly Compe::ve Firm. Again, the reason is that if the
firm wishes to sell more, they do not need to lower price. As a result of
its Perfectly Elas:c Demand Curve, a Perfectly Compe::ve Firm can sell
infinite quan:ty at the Market Price.
However, the formula; MRP = MPP X PRICE; does not work for any other
industry. The reason being is that, a firm in Imperfect Compe::on,
Oligopoly or Monopoly, has to lower price to sell more goods.
When a firm hires more workers, each worker causes an increase in Total
Output. In order to sell this extra output (MPP), the firm must lower price
(the law of demand). As such, in order to calculate MRP for Imperfect
Compe::on, Oligopoly or Monopoly; we need a formula that takes into
account the fact that in the other markets structures, the law of demand
applies and as such the firm must lower its price in order to sell the extra
output that these extra factors of produc:on have produced. This causes
the MRP for workers in these Market Structures to fall quicker than for
workers employed in Perfectly Compe::ve firms.
Before we look at the formula that we will use, we just need to look over
one more defini:on.
Marginal Revenue (MR): is the extra revenue received by the firm for
producing one extra unit of output.
Jonathan Traynor 7
 LC Economics www.thebusinessguys.ie©

The rela:onship between

1) Marginal Physical Product (MPP)
2) Marginal Revenue Product (MRP)
3) Marginal Revenue (MR)
Is given by the equa:on
Marginal Revenue Product = Marginal Physical Product X Marginal Revenue
MRP = MPP X MR

Marginal Revenue Product (MRP) Curve

MRP
!

MRP

Quan:ty of the
Factor of Produc:on
Marginal Revenue Product is calculated by mul:plying Marginal Physical
Product by Marginal Revenue.
This is because MPP is the extra amount of output that the firm gains
from employing one extra unit of a factor of produc:on and MR is the
money a firm receives from selling one extra unit of output.
Therefore if you mul:ply the amount of extra product (MPP) by the
amount of extra revenue the firm gets for the sale of each product (MR),
your answer is the extra amount of revenue received by the firm (MRP).
Jonathan Traynor 8
LC Economics www.thebusinessguys.ie©

Explaining the Shape of the Marginal Revenue Product Curve

We have already stated that the method for calcula:ng MRP in Perfect
Compe::on is different to the way we calculate MRP in either Imperfect
Compe::on, Oligopoly or Monopoly. What I will do now is try to
convince you that they are in fact the same formula.
We said to calculate MRP in Imperfect Compe::on, Oligopoly or
Monopoly you use the following formula
MRP = MPP X MR
We also said to calculate MRP in Perfect Compe::on you use a different
formula
MRP = MPP X PRICE
The only thing you should note here is that, in Perfect Compe::on,
Price = Marginal Revenue (P = MR). Therefore, we were actually always
using the first formula to calculate MRP in Perfect Compe::on. The only
difference was that we were calling Marginal Revenue, Price.
One thing to keep in mind here is that, in Perfect Compe::on, Price (or
Marginal Revenue) is constant. It does not change. If the individual
Perfectly Compe::ve firm wishes to sell extra output, they do not have
to lower price. This is due to their Perfectly Elas:c (flat) demand curve.
You can look at it as not obeying the Law of Demand.
However, if a firm wishes to sell a greater quan:ty and is not opera:ng in
a Perfectly Compe::ve market ( the firm is opera:ng in one of the other
three market structures), then they have to lower price to sell the extra
output that was produced by the extra unit of a factor of produc:on. This
is because, firms in these market structures face downward sloping
demand curves, and as such have to lower price to sell more goods.
Therefore, to explain the shape of the MRP curve depends on which
market structure the firm is opera:ng in.
Explain the Shape of the MRP curve for a Perfectly Compe--ve Firm
1) Ini:ally, the MRP curves slopes upward due to the greater returns
from the increased degree of specialisa:on each factor of produc:on.
2) The MRP curves starts to slope downwards again due to the Law of
Diminishing Marginal Returns which states that as extra units of a
variable factor of produc:on are added to a set sized fixed factor of
produc:on, eventually a point will be reached when the extra output
caused by the last unit of the variable factor employed begins to
decline.

Jonathan Traynor 9
LC Economics www.thebusinessguys.ie©

Explain the Shape of the MRP curve for a Firm in either Imperfect
Compe--on, Oligopoly or Monopoly
1) Ini:ally, the MRP curves slopes upward due to the greater returns
from the increased degree of specialisa:on of each factor of
produc:on.
The MRP curve starts to slope downwards for two reasons
2) Law of Diminishing Marginal Returns which states that as extra units
of a variable factor of produc:on are added to a set sized fixed factor
of produc:on, eventually a point will be reached when the extra
output caused by the last unit of the variable factor of produc:on
employed begins to decline.
3) Law of Demand: If sellers (firms) in these markets wish to increase
the quan:ty of the goods that they sell, they must lower price. This
causes MRP to fall faster than it otherwise would in Perfect
Compe::on.
EXAMPLE:
From the data listed below, complete the table and then draw the
Marginal Revenue Product Curve. What type of Market Structure is this
firm opera:ng in? Give a reason for your answer.

Marginal Marginal
Number
Total Physical Revenue
of Price
Output Product Product
Workers
(MPP) (MRP)
0 0 10

1 5 10

2 12 10

3 16 10

4 17 10

Jonathan Traynor 10
 LC Economics www.thebusinessguys.ie©

Answer:

Marginal Marginal
Number
Total Physical Revenue
of Price
Output Product Product
Workers
(MPP) (MRP)
0 0 - 10 -

1 5 5 10 50

2 12 7 10 70

3 16 4 10 40

4 17 1 10 10

MRP
70

60

50

40
MRP

30

20

10

0
1 2 3 4
Number or Workers

The firm is opera:ng in a Perfectly Compe::ve Market as the firm does

not need to lower price in order to sell more output. The Price that the
firm charges it customers does not change as sales expand.

Jonathan Traynor 11
LC Economics www.thebusinessguys.ie©

EXAMPLE:
From the data listed below, complete the table and then draw the
Marginal Revenue Product Curve. What type of Market Structure is this
firm opera:ng in? Give a reason for your answer.

Marginal Marginal
Number
Total Physical Revenue
of MR
Output Product Product
Workers
(MPP) (MRP)
0 0 10

1 5 9

2 12 8

3 16 7

4 17 6

Answer:

Marginal Marginal
Number
Total Physical Revenue
of MR
Output Product Product
Workers
(MPP) (MRP)
0 0 - 10 -

1 5 5 9 45

2 12 7 8 56

3 16 4 7 28

4 17 1 6 6

Jonathan Traynor 12
 LC Economics www.thebusinessguys.ie©
MRP
70

60

50

40
MRP

30

20

10

0
1 2 3 4

Number or Workers

I would most likely expect this firm to be either Imperfectly Compe::ve,

Oligopolis:c or monopolis:c. This is because the firm must lower price in
order to sell more output. The price that the firm charges its customers
fall as sales expand. (It is less likely to be Oligopolis:c than the other two
as firms in Oligopoly tend not to change their prices based on fear of the
poten:al reac:on from their compe:tors).
How does a firm Decide the Quan-ty of Factors of Produc-on to
Employ?
Now that we know how to calculate MRP we must ask the ques:on “how
does the firm decide on what quan:ty of each factor of produc:on to
employ?”
The answer lies in the rela:onship between Marginal Revenue Product
(MRP) and Marginal Costs (MC).
The Marginal Benefit to the firm of hiring one extra unit of a factor of
produc:on is that factors MRP. This is the amount of extra money that
factor brings into the firm. E.g. if the MRP of one extra worker is €1000
per week, then this is the Marginal Benefit to the firm of hiring that extra
worker. Therefore, we must make the important leap and say that the
MRP curve is the demand curve for a factor of produc:on, the higher
the extra revenue gained from employing a factor of produc:on, the
greater the demand for that factor.
The Marginal Cost to the firm would be this workers wages.

Jonathan Traynor 13
 LC Economics www.thebusinessguys.ie©

If the wage of a worker is €900 per week, the firm will employ this worker
as his MRP > MC. (€1,000 > €900)
If the wage of a worker is €1,100 per week, the firm will not employ this
worker as his MRP < MC. (€1,000 < €1,100)
If the wage of a worker is €1,000 per week, the firm will employ this
worker and no more. (€1,000 = €1,000)
It is the point where MRP = MC, that the firm stops employing workers
because at this point all poten:al benefits from employing extra workers
has been exhausted and to con:nue to employ more workers beyond this
point would result in the firm paying out more money to that worker
than it would receive from selling that workers output in the
marketplace.
It is this logic that the firm uses in order to decide what amount of each
factor of produc:on to employ.
The firm will con:nue to employ extra units of each factor of produc:on
up to and including the point where MRP = MC.
Marginal Revenue Product (MRP) and Marginal Cost

MRP ! ! MC

MRP of Last
Factor
Employed

MRP

Quan:ty of FoP Quan:ty of the

Employed Factor of Produc:on

Jonathan Traynor 14
LC Economics www.thebusinessguys.ie©

More technically, its the downward sloping part of the MRP curve is the
demand curve for that factor of produc:on.
Factors that Affect the MPP of a Factor of Produc-on
Marginal Physical Product (MPP): is the extra output produced when
an addi:onal unit of a factor of produc:on is employed.
1) Quality or Specialised Nature of the Factors: If the quality of the
factor used improves then that factor may become more efficient and
so addi:onal output will be produced, resul:ng in increased MPP.
2) Training or Educa-on Provided for the Factor: If the factor is more
highly trained or has atained a good standard of educa:on then it
may become more skilled, resul:ng in increased efficiency and more
output.
3) Exper-se of the Entrepreneur: If the entrepreneur has exper:se in
organising the produc:on unit, then each factor may be more
produc:ve and work to its maximum efficiency.
4) Law of Diminishing Marginal Returns: As each addi:onal unit of a
factor is used a point will be reached where the addi:onal output
produced will decline and so MPP will decline.

As the Marginal Revenue Product (MRP) is propor:onal to the Marginal

Physical Product (MPP), everything that effects the MPP also effects the
MRP.
Factors that Affect the MRP of a Factor of Produc-on
Marginal Revenue Product (MRP): is the extra revenue earned when an
addi:onal unit of a factor of produc:on is employed.
1) Quality or Specialised Nature of the Factor: If the quality of the factor
used improves then that factor may become more efficient and so
addi:onal output will be produced, resul:ng in increased MRP.
2) Training or Educa-on Provided for the Factor: If the factor is more
highly trained or has atained a good standard of educa:on then it
may become more skilled, resul:ng in increased efficiency and more
output.
3) Exper-se of the Entrepreneur: If the entrepreneur has exper:se in
organising the produc:on unit, then each factor may be more
produc:ve and work to its maximum efficiency.

Jonathan Traynor 15
LC Economics www.thebusinessguys.ie©

4) Law of Diminishing Marginal Returns: As each addi:onal unit of a

factor is used a point will be reached where the addi:onal output
produced will decline and so MRP will decline.
5) The Produc-vity or Commitment of the Factor: The more produc:ve
each addi:onal factor employed is then the more MRP that factor will
earn. The more conscien:ous a person is then the more produc:ve
that person will be.
6) The Selling Price of the Output: If the selling price obtained on the
market is rising or constant (and not falling) then the higher will be
that factor’s MRP.
7) The Law of Demand: On the market, the law of demand dictates that
in order for more to be bought then price must be reduced – this
affects the MRP obtained by the firm.

Difficul-es in Measuring MRP

1) Not all Factors Produce Physical Output: Where services are provided
no physical output is produced and so MRP cannot be measured.
2) Output Not Sold in the Market Place: In the public sector where
output is not sold in the market it is difficult to calculate MRP.
3) Combina-on of Capital and Labour to Produce Addi-onal Output: It
is difficult to measure the contribu:on of each individual factor.

Supply Price, Economic Rent and Transfer Earnings

Supply Price: The minimum payment necessary to bring a factor into
use and maintain it in that par:cular use.
It is the amount of money that the owner of that factor of produc:on
must receive in order to keep that factor doing what it is doing in the long
run. E.g. A stockbroker may not be willing to work for less than 1,000 a
week. This is his supply price. If his wages fall below 1,000 a week he
quits.
Economic Rent: Any earnings of a factor of produc:on above its supply
price/transfer earnings.
E.g. An avid rugby fan may be willing to work for the I.R.F.U. for €20,000 a
year. However if this person gets a job in the I.R.F.U. for €50,000 a year
than his economic rent is €50,000 - €20,000 = €30,000.

Jonathan Traynor 16
LC Economics www.thebusinessguys.ie©

Transfer Earnings: The earnings of a factor in the next best alterna:ve

employment.
or
What a factor must receive to keep it in its present use and prevent it
from transferring to another use.
E.g. If a stockbroker is earning €1,000 a week as a stockbroker but could
earn €900 a week as an investment banker, then the €900 is his transfer
earnings and the €100 is economic rent.
Also, if a factor of produc:on is specific, then it has no other uses. Its
transfer earnings would be zero and so the en:re payment is economic
rent.
Economic Rent = Payment to that Factor - Transfer Earnings
This might seem unusual, because when explaining economic rent, we
said that it was current wage minus supply price. Well it actually is, but
the idea here is that your transfer earnings become your supply price and
as such we have the previous formula. This logic should be somewhat
intui:ve. If you can get more money in another job (Transfers Earnings)
you will move to that other job. See the example below.
L.C.Q.
A computer soYware engineer, who earns €40,000 annually in her
current employment, decides to become an entrepreneur and set up her
own business in which she expects to earn €75,000 annually.
(i) What is this entrepreneur’s supply price? Explain your answer.
(ii) If the business performs as expected, will the entrepreneur earn an
‘economic rent’? Explain your answer. (15 marks)
Answer
(i) The entrepreneur’s supply price is €40,000 as this is the minimum
payment she needs to receive to work as a soYware engineer.
(ii) Yes, if the business performs as expected the entrepreneur will earn
an economic rent. She will earn €35,000. As her supply price is €40,000
and she will earn €75,000 annually as an entrepreneur, the economic
rent earned is what she earns in excess of her supply price.

Jonathan Traynor 17
LC Economics www.thebusinessguys.ie©

Circumstances under which a Factor of Produc-on could earn an

Economic Rent
1) Shortage in the supply of any factor of produc-on: if land / labour is
in short supply – its price will increase.
2) Possession of a rare skill or talent: if a person has a skill which is in
great demand e.g. a professional soccer player then they can
command high fees.
3) Rent of Ability: an entrepreneur who invents a much sought aYer
commodity may command high income e.g Bill Gates and the
inven:on of the ‘windows’ opera:ng systems
4) Completely Specific Factors of Produc-on: there is no opportunity
cost in the use an exis:ng factor of produc:on which is completely
specific (not adaptable to other uses e.g. a railway sta:on). If a
payment is made for the use of this specific factor then this en:re
payment would be economic rent as the opportunity cost is zero.
Rent of Ability: is an economic rent earned by a factor of produc:on
due to their natural talent or business acumen.
E.g. Premier League Footballer who has a superior physical ability.
Referring back to economic rent, a factor of produc:on can earn
economic rent when it is not possible to increase the supply of that
factor.
The Control of Economic Rent
Economic Rent can be seen as a surplus payment to a factor of
produc:on which is not necessary to keep it in its present use and as
such it is oYen suggested that such economic rent should be taxed or
controlled in some way. The following are suggested methods that could
be used in controlling economic rent.
1) Imposi-on of a Maximum Price: A maximum price could be imposed
on a factor. This usually atempted by the government and
occasionally by private organisa:ons. However it is rarely successful.
Atempts were made to put an upper limit of transfer fees on soccer
players in England which were unsuccessful. Highly skilled individuals
with rare talents are generally able to con:nue to earn economic rent
as long as their talents are in demand.
2) Tax Economic Rent: The main advantage in taxing economic rent is
that the government gains revenue and the tax does not affect
resource alloca:on. However it is excep:onally difficult to accurately
calculate economic rent especially for factors other than land. If the

Jonathan Traynor 18
LC Economics www.thebusinessguys.ie©

government were to pursue this policy, it may cause the factors of

produc:on to leave the economy resul:ng in reduced GNP.
3) Government Ac-on: The government can take measures to increase
the supply of a factor of produc:on so that economic rents can be
reduced or eliminated. E.g. tradesmen. Up un:l recently carpenters
were earning massive economic rent in the boom years. The
government could have encouraged skilled immigra:on or increased
the number of appren:ceships available. Unfortunately a drop in
demand following the economic downturn was responsible for
elimina:ng their economic rent.
Types of Factors of Produc-on
1) A Specific Factor: A specific factor of produc:on is specialised and
therefore cannot be easily adapted to other uses. A rocky piece of
hillside land is perhaps only useful for grazing sheep and goats and as
such could be classified as a specific factor of produc:on.
2) A Non Specific Factor: A non specific factor of produc:on can be
easily transferred from one use to another. A flat well irrigated field
can be used to grow crops, build houses, mine for precious metals etc.
3) Occupa-onal Mobility: refers to the mobility or movement of a factor
of produc:on from one type of produc:ve ac:vity to another type of
produc:ve ac:vity. If an economics teacher lost his job, with his
qualifica:ons in economics, he could hope to find employment in
Investment Banking.
4) Geographical Mobility: refers to the mobility or movement of a factor
of produc:on from a produc:ve ac:vity in one loca:on to a
produc:ve ac:vity in another loca:on. Geographical mobility is the
ease with which resources can change loca:ons. Now with the EU,
European workers can live and work in any European country (that is a
member of the EU) without any visa or other red tape. This has
increased the degree of geographical mobility for European labour.
In economics we have different names for the return/reward/payment
that each of the factors of produc:on receive and it is necessary to know
each of them as they can come up in both the long and short ques:ons.
FACTOR OF PRODUCTION REWARD
LAND RENT
LABOUR WAGES
CAPITAL INTEREST
ENTERPRISE PROFIT

Jonathan Traynor 19