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9708 · 1.3

Factors of production — practice questions

Practice and worked examples for 9708 Factors of production. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A bakery employs 12 workers, rents a shop, uses ovens and mixers, and is run by an owner who invested her savings and decides the product range.

Identify each factor of production and its reward.

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Land — the shop premises (natural/location resource) → rent paid to the landlord.

Labour — 12 workers' physical and mental effort → wages.

Capital — ovens, mixers, display equipment (man-made aids) → interest (return on invested capital equipment).

Enterprise — the owner organising factors, bearing risk, choosing recipes and pricing → profit (or loss).

Note: the owner's savings used to buy equipment finance capital; her decision-making and risk-taking are enterprise.

Worked example 2

A small manufacturing firm produces 10,000 units of a product, selling each for $50. The firm's annual costs are as follows:

  • Rent for the factory premises: 80,00080,000
  • Wages and salaries for workers: 250,000250,000
  • Interest on a bank loan used to purchase machinery: 30,00030,000

Calculate the firm's total revenue, total costs, and the resulting profit for the entrepreneur.

Show solution outline

The solution involves calculating the rewards for the factors of production as costs and then determining the residual profit for enterprise.

Step 1: Calculate Total Revenue (TR) Total Revenue is the total income from selling the goods. TR = Price per unit × Quantity sold TR = $50 × 10,000 units **TR = 500,000∗∗500,000**

Step 2: Identify and sum the costs of the factors of production.

  • Cost of Land (Rent): 80,00080,000
  • Cost of Labour (Wages): 250,000250,000
  • Cost of Capital (Interest): 30,00030,000

Total Costs (TC) = Rent + Wages + Interest TC = 80,000+80,000 + 250,000 + 30,00030,000 **TC = 360,000∗∗360,000**

Step 3: Calculate the reward for Enterprise (Profit). Profit is the residual amount after all costs are deducted from revenue. Profit = Total Revenue - Total Costs Profit = 500,000−500,000 - 360,000 **Profit = 140,000∗∗140,000**

Conclusion: The entrepreneur's reward for organising the factors of production and bearing the risk is a profit of $140,000 for the year.

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