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.

Human capital Housework Manual labour Slavery Unfree labour Volunteer Wage slavery Wage labour

TYPES OF 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

Quantity ofApples

0

Price ofApples

Demand

Supply

Demand

Supply

Quantity ofApple Pickers

0

Wage ofApple

Pickers

(a) The Market for Apples (b) The Market for Apple Pickers

P

Q L

W

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)

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.

Marginal Product of Labour

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

Productionfunction

Quantity ofApple Pickers

0

Quantityof Apples

300280

240

180

100

1 2 3 4 5

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

0 Quantity ofApple Pickers

0

Value of the

MarginalProduct

Value of marginal product(demand curve for labour)

Marketwage

Profit-maximizing quantity

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 MarketWage

(price oflabour)

0 Quantity ofLabour

Supply

What Causes the Labour Supply Curve to Shift?

Changes in TastesChanges in Alternative Opportunities ImmigrationTime periodSkill levels required

What Causes the Labour Demand Curve to Shift?

Technological ChangeSupply of Other factorsCost of hiring labourWages/salariesNational Insurance contributionsPension 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 MarketWage

(price oflabour)

0 Quantity ofLabour

Supply

Demand

Equilibriumwage, W

Equilibriumemployment, L

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

labour)

0 Quantity ofLabour

Supply, S

Demand

2. . . . reducesthe wage . . .

3. . . . and raises employment.

1. An increase inlabour supply . . .

S

W

L

W

L

Shifts in Labour SupplyAn 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 DemandWage

(price oflabour)

0 Quantity ofLabour

Supply

Demand, D

2. . . . increasesthe wage . . .

3. . . . and increases employment.

D

W

L

W

L

1. An increase inlabour demand . . .

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

– Indicates efficiency– Competitive

advantage

Measuring productivity in service industries, especially the public sector can be difficult. How would you measure the productivity of a teacher?

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– Risk or danger involved– Social or unsocial hours– Shift patterns– Productivity

Some jobs might attract a premium because of the danger or risk associated with carrying it out!

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

LandLand 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