2281 · 1.2

The factors of production — practice questions

Practice and worked examples for 2281 The 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

Crafty Chairs Co. produces handmade wooden chairs. In one month, its total revenue from sales was $25,000. Its costs were:

Rent for the workshop: $2,000$
Wood and other raw materials: $6,000$
Wages for two carpenters: $8,000 total
Interest on a bank loan for machinery: $1,000$

Calculate the total cost of production and the profit earned by the entrepreneur.

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Step 1: Calculate Total Costs Total costs are the sum of payments for land, labour, and capital.

Cost of Land (rent + raw materials): $2,000 +$ 6,000 = $8,000$
Cost of Labour (wages): $8,000$
Cost of Capital (interest): $1,000$

Total Costs = $8,000 +$ 8,000 + $1,000 = **$ 17,000**

Step 2: Calculate Profit (Reward for Enterprise) Profit is calculated as total revenue minus total costs. It is the reward for the entrepreneur's risk-taking.

Profit = Total Revenue - Total Costs
Profit = $25,000 -$ 17,000 = ** $8,000**$

Final Answer: The total cost of production is $17,000, and the profit for the enterprise is $8,000.

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