A Level Economics 9708: Identifying Factors of Production in a Small Business

Amara is a self-employed potter who runs a small pottery workshop. She rents a workshop unit from a local landlord; she uses $5,000 of her own savings together with a bank loan to buy a pottery kiln; and she personally makes all the decisions about what to produce, organises the workshop, and bears the risk that the business could make a loss if her pots do not sell.

(a) Identify the factor of production represented by the workshop unit that Amara rents, and state the reward earned by whoever supplies this factor. [2]

(b) Identify the factor of production represented by the kiln and the finance used to buy it, and state the reward earned by whoever supplies this factor. [2]

(c) Explain how Amara's own role in organising the workshop and bearing the risk of a possible loss represents a different factor of production from land, labour and capital, and state the reward she earns for taking on this role. [3]

Part (a): The workshop unit

The workshop unit that Amara rents is a natural resource with a fixed location, it represents the factor of production land. Whoever owns and supplies this factor of production (the local landlord) earns rent in return for allowing Amara to use it.

Part (b): The kiln and the finance used to buy it

The kiln is a manufactured item used to produce other goods (pots), and the savings and bank loan used to buy it are the finance behind this purchase, together these represent the factor of production capital. Whoever supplies capital, here, the bank that lent part of the money, as well as Amara’s own savings, earns interest as the reward for supplying it.

Part (c): Amara’s own role

Land, labour and capital are all factors that can be hired or bought at a reward that is largely fixed and known in advance (a landlord agrees a rent, a worker agrees a wage, a lender agrees an interest rate. Amara’s own role is different: she brings these factors of production together, decides what pots to make and how to make them, organises the day-to-day running of the workshop, and) crucially. Bears the risk that the business might fail to cover its costs and make a loss, with no guarantee of any payment at all. This organising, decision-making and risk-bearing role is a separate factor of production in its own right: enterprise.

Because the reward to enterprise is not agreed in advance the way rent, wages and interest are, Amara earns profit. A residual reward that depends on how well the business performs, and which could turn out to be positive, zero, or even negative (a loss) if her costs exceed her revenue.

Final answers

(a) Workshop unit $=$ land; reward $=$ rent
(b) Kiln and finance to buy it $=$ capital; reward $=$ interest
(c) Amara’s organising and risk-bearing role $=$ enterprise; reward $=$ profit (which may be positive, zero, or negative)