PROJECT

FACTORS OF PRODUCTION
LAND & LABOUR

SUBMITTED BY
GROUP # 3
PRODUCTION
 PRODUCTION
 Goods, and services, or commodities, are
produced in order to satisfy people’s wants.
 Production refers to the making of these goods and
the production of services. Firms or business are
producers, they are responsible for producing
goods and services.
 The firms uses the resources of land, labour and
capital (input) to make goods and services
(output).
 The Production Function
• For a profit maximizing firm, the revenues
and the costs are the two important
components.
• The costs will be related to the production
of the good or service by using the different
categories of inputs.
• The revenues are generated by selling the
output produced.
 STAGES OF PRODUCTION
 Many thousands of different firms, all over the
world are involved in the production of goods and
services. For the economist it is useful to try to
sort them out, or classify them, according to what
they do. They can be classified into the following:
 1: PRIMARY INDUSTRY
 2: SECONDARY INDUSTRY
 3: TERTIARY INDUSTRY
 PRIMARY INDUSTRY
 Those firms which produce
natural resources by growing
plants, like wheat and barley,
digging for minerals, such as
coal and copper or breeding
animals, are called primary
firms and belong to the primary
section or primary industry in
an economy.
 Primary means it is the first
stage of production, as many of
the raw materials grown or dug
out of the ground are used to
produce something else.
Primary industries are also
called extractive industries.
 SECONDARY INDUSTRY
 The use of raw materials to
make other goods is known as
manufacturing and firms who
engage in this activity belong to
the manufacturing or secondary
industry.
 For example, the record
industry presses records from
plastic made from oil. Paper for
record sleeves is made from
woods. Cars and vans are made
from metals
 TERTIARY INDUSTRY
 A great many firms do not
produce any goods at all. Many
sell goods, transport them, or
provide financial services, like
the banks, building societies
and insurance companies. Your
school provides an education
service, your local hospital a
health service. There are also
many more personals services,
like hairdresser, window-
cleaners, tailors, gardeners. All
these firms provide a service
and belong to the service sector
in the economy.
 The Factors of Production
• Capital
• Labour
• Land
• Entrepreneur
• Technology
LABOUR
 LABOUR
 In economics, labour (or labor) is a measure of
the work done by human beings. It is
conventionally contrasted with such other factors
of production as land and capital.
 TYPES OF LABOUR
 Human capital
 Housework
 Manual labour
 Slavery
 Unfree labour
 Volunteer
 Wage slavery
 Wage labour
 COMPENSATION
 Wage is a basic compensation for labour, and the
compensation for labour per period of time is referred to as
the wage rate. The two terms are sometimes used
interchangeably.
 Other frequently used terms include:
 wage = payment per unit of time (typically an hour)
 earnings = payment accrued over a period (typically a
week, a month, or a year)
 total compensation = earnings + other benefits for labour
 income = total compensation + unearned income
 economic rent = total compensation - opportunity cost
 Economists measure labour in terms of hours worked, total
wages, or efficiency.
 total cost = fixed cost + variable cost
The Labour Market
 The Labour Market
• The market for a factor
of production - labour
• Refers to the demand
for labour – by
employers and the
supply of labour
(provided by potential
employees) The demand for labour is dependent on the
demand for the final product that labour
produces.The greater the demand for office
space the higher the demand for construction
workers.
 The Versatility of Supply and Demand
(a) The Market for Apples (b) The Market for Apple Pickers

Price of Wage of
Apples Apple
Pickers
Supply Supply

P W

Demand Demand

0 Q Quantity of 0 L Quantity of
Apples Apple Pickers
 THE DEMAND FOR LABOUR

 Most labour services, rather than

being final goods ready to be
enjoyed by consumers, are inputs
into the production of other goods.
 Marginal Product of Labour

 The marginal product of labour is

the increase in the amount of
output from an additional unit of
labour.
– MPL = ∆Q/∆L
– MPL = (Q2 – Q1)/(L2 – L1)
 Marginal Product of Labour

 Diminishing Marginal Product of Labour

– As the number of workers increases, the
marginal product of labour declines.
– As more and more workers are hired, each
additional worker contributes less to production
than the prior one.
– The production function becomes flatter as the
number of workers rises.
– This property is called diminishing marginal
product.
 Diminishing Marginal Product of
Labour
 Diminishing marginal product
refers to the property whereby the
marginal product of an input
declines as the quantity of the
input increases.
 The Value of the Marginal Product
and the Demand for Labour
• The value of the marginal product
is the marginal product of the
Labour multiplied by the market
price of the output.
VMPL = MPL × P
 The Value of the Marginal Product
and the Demand for Labour
 The value of the marginal product
(also known as marginal revenue
product) is measured in dollars.
 It diminishes as the number of
workers rises because the market
price of the good is constant.
 How the Competitive Firm Decides How Much
Labour to Hire

 Price (P) is $10 in this case.

 The Production Function
Quantity
of Apples
Production
300 function
280

240

180

100

0 1 2 3 4 5 Quantity of
Apple Pickers
 The Value of the Marginal Product
and the Demand for Labour
• To maximize profit, the
competitive, profit-maximizing firm
hires workers up to the point
where the value of the marginal
product of labour equals the wage.
VMPL = Wage
 The Value of the Marginal Product
and the Demand for Labour
• The value-of-marginal-product
curve is the labour demand curve
for a competitive, profit-
maximizing firm.
The Value of the Marginal Product of Labour
Value
of the
Marginal
Product

Market
wage

Value of marginal product

(demand curve for labour)

0 Profit-maximizing quantity Quantity of

Apple Pickers
 Input Demand and
Output Supply
• When a competitive firm hires
labour up to the point at which the
value of the marginal product
equals the wage, it also produces
up to the point at which the price
equals the marginal cost.
 THE SUPPLY OF LABOUR
 The labour supply curve reflects
how workers’ decisions about the
labour-leisure tradeoff respond to
changes in opportunity cost.
 An upward-sloping labour supply
curve means that an increase in
the wages induces workers to
increase the quantity of labour
they supply.
 Equilibrium in a Labour Market
Wage
(price of
labour)
Supply

0 Quantity of
Labour
What Causes the Labour Supply
Curve to Shift?

 Changes in Tastes
 Changes in Alternative Opportunities
 Immigration
 Time period
 Skill levels required
 What Causes the Labour Demand
Curve to Shift?
 Technological Change
 Supply of Other factors
 Cost of hiring labour
 Wages/salaries
 National Insurance contributions
 Pension contributions
 Administration costs associated with tax
payments and adhering to employment
laws and regulations
 EQUILIBRIUM IN THE LABOUR
MARKET
 The wage adjusts to balance the
supply and demand for labour.
 The wage equals the value of the
marginal product of labour.
 Equilibrium in a Labour Market
Wage
(price of
labour)
Supply

Equilibrium
wage, W

Demand

0 Equilibrium Quantity of
employment, L Labour
 EQUILIBRIUM IN THE LABOUR
MARKET
 Labour supply and labour demand determine the
equilibrium wage.
 Shifts in the supply or demand curve for labour
cause the equilibrium wage to change.
 A Shift in Labour Supply
Wage
(price of 1. An increase in
Supply, S labour supply . . .
labour)
S

2. . . . reduces
the wage . . .
Demand

0 L L Quantity of
Labour
3. . . . and raises employment.
 Shifts in Labour Supply
 An increase in the supply of labour
– Results in a surplus of labour.
– Puts downward pressure on wages.
– Makes it profitable for firms to hire
more workers.
– Results in diminishing marginal
product.
– Lowers the value of the marginal
product.
– Gives a new equilibrium.
 A Shift in Labour Demand
Wage
(price of Supply
labour)

1. An increase in
labour demand . . .
W

2. . . . increases
the wage . . . D

Demand, D

0 L L Quantity of
Labour
3. . . . and increases employment.
 Shifts in Labour Demand

 An increase in the demand for

labour :
– Makes it profitable for firms to hire
more workers.
– Puts upward pressure on wages.
– Raises the value of the marginal
product.
– Gives a new equilibrium.
 The Labour Market

• Productivity:
• A measure of output per person
per time period
Total Output
Productivity = --------------------
Quantity of Factor
 The Labour Market
• Productivity
– Not always easy
to measure
– Influences costs –
output = potential
revenue
counterbalanced
by wage costs Measuring productivity in service
industries, especially the public sector
– Indicates efficiency can be difficult. How would you
measure the productivity of a
– Competitive teacher?
advantage
 The Labour Market
• The relative demand and
supply of labour can
help to explain
differences in wage rates
for different occupations
– e.g. Supply of those
able to train as nurses
higher than those
with the talent to be
successful professional
footballers, hence
the higher wage rate
of footballers! Nurses help care for people and save
lives, footballers entertain. One earns
£90,000 per week, the other £350.
 The Labour Market
• Other factors influencing
wage differentials:
– Status attached to the job
– Discrimination
– Race
– Gender
– Monopsony – a dominant buyer
in the market
– Sector – public or private
– Trade Union power or influence
– Length of career
Some jobs might attract a premium
– Risk or danger involved because of the danger or risk
– Social or unsocial hours associated with carrying it out!
– Shift patterns
– Productivity
 SUPPLY SHOCK
 Supply shocks affect the amount of output that can
be produced for a given amount of inputs
 Shocks may be positive (increasing output) or
negative (decreasing output)
 Examples: weather, inventions and innovations,
government regulations, oil prices
 Supply shocks shift graph of production function
 SUPPLY SHOCK
 Negative (adverse) shock: Usually slope of
production function decreases at each level of
input (for example, if shock causes parameter A to
decline)
 Positive shock: Usually slope of production
function increases at each level of output
An adverse supply shock that lowers
the MPL
LAND
 Land
 Land in economics comprises all
naturally occurring resources whose
supply is inherently fixed (i.e., does not
respond to changes in price), such as
geographical locations (excluding
infrastructural improvements and
"natural capital", which can be changed
by human actions), mineral deposits,
and even geostationary orbit locations
and portions of the electromagnetic
spectrum.
 Natural resources
 Natural resources are naturally
occurring substances that are
considered valuable in their
relatively unmodified (natural)
form.
 Value of Natural Resources
 A natural resource's value rests in the amount
of the material available and the demand for
it. The latter is determined by its usefulness to
production. A commodity is generally
considered a natural resource when the
primary activities associated with it are
extraction and purification, as opposed to
creation. Thus, mining, petroleum extraction,
fishing, hunting, and forestry are generally
considered natural-resource industries, while
agriculture is not.
 Land Rent
 Income derived from ownership or
control of natural resources is
often referred to as rent.
 Rent is the portion of production
that goes to freeholders for
"allowing" production on the land
they control.
 IMPORTANCE OF LAND
• Location
• Transportation
• Density of population (customers)
• Division and specialization of
labour available
• Availability of raw material
 LAND REFORMS
• Land reforms is an often-controversial
alteration in the societal arrangements
whereby government administers possession
and use of land. Land reform may consist of a
government-initiated or government-backed
real estate property redistribution, generally of
agricultural land, or be part of an even more
revolutionary program that may include
forcible removal of an existing government
that is seen to oppose such reforms.
LAND OWNERSHIP AND TENURE
 Traditional land tenure, as in the indigenous nations or
tribes of North America in the Pre-Columbian era.
 Feudal land ownership, through fiefdoms
 Life estate, interest in real property that ends at death.
 Fee tail, hereditary, non-transferable ownership of real
property.
 Fee simple. Under common law, this is the most complete
ownership interest one can have in real property.
 Leasehold or rental
 Rights to use a commons
 Sharecropping
 Easements