NSS Exploring Economics 2 (3rd Edition)

Revision Notes

Chapter 10 Factors of production

Labour supply and labour productivity

1. Labour supply = Total number of working hours

= Number of workers × Average working hours of workers

2. Factors that affect labour supply:

Labour supply 
Number of workers  Average working hours of workers 
• Population size  • Number of public holidays 
• Working population  • Number of days of annual leave
• Minimum working age  and sick leave 
• Retirement age  • Maximum working hours 
• Years of schooling or training 
• Attractions of immigrants 
or restrictions for immigrants 

3. Calculation of labour productivity:

Number of workers employed 5

Units of toys produced 90
Working hours per worker 6

Total output
Labour productivity =
Total number of working hours
90
=
5× 6
= 3 units per hour

NSS Exploring Economics 2 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 10)
4. Factors that affect labour productivity:
• Health of workers
• Education and training
• Incentive to work (e.g., reward related to productivity)
• Capital and technology
• Management (e.g., maintaining good teamwork and high morale)
• Working environment

Mobility of labour

5.
Occupational mobility of labour Geographical mobility of labour
The willingness and ease of labour The willingness and ease of labour
Meaning to change from one occupation to to move from one working area to
another another
Higher occupational mobility if Higher geographical mobility if
a. Improved remuneration and a. Improved economic, political
working conditions at alternative and social conditions at other
occupations / poorer working areas / poorer
remuneration and working conditions at current working
Determinants conditions at current occupation areas
b. Relaxing entrance requirements b. Relaxing immigration
c. More retaining programmes restrictions
d. More market information c. Better transport network and
lower transport cost
d. More market information

Methods of wage payments

6. • Piece rate: Workers are paid according to the amount of their output.
• Time rate: Workers are paid based on their working hours.
• Profit-sharing scheme (or commission): A portion of the firm’s profit (or sales revenue) is
distributed to workers as a wage payment.
• Tips: A gift of money paid by customers to reward workers.

NSS Exploring Economics 2 (3rd Edition) 2 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 10)
7. Situations when a certain payment method is commonly adopted:

Piece rate: Time rate:

• When workers’ contribution can be • When workers’ contribution is too costly
easily measured to measure
• When product quality can be easily • When higher quality of work is required
monitored
Profit-sharing scheme: For supervisors and managers whose performance is decisive to the
firm’s profit
Commission: For sales representatives and real estate agents whose efforts are difficult to
measure and monitor
Tips: For workers who provide direct service to customers

8. Comparison between different wage payment methods:

Profit-sharing
Piece rate Time rate scheme Tips
(or commission)
To employers:
Workers’ work incentive
Higher Lower Higher Higher
and productivity
Cost of calculating wage
Higher Lower Higher Higher
payments
Cost of monitoring
workers’ performance Lower Higher Lower Lower
(against shirking)
Cost of monitoring product
Higher Lower Lower Lower
quality
Ease of recruiting workers — — Difficult Difficult
Part of the
Transferring business risk business risks can
— — —
from employers to workers be transferred to
workers
To workers:
Possibility of earning
Can Cannot Can Can
higher income
Income stability Unstable Stable Unstable Unstable

NSS Exploring Economics 2 (3rd Edition) 3 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 10)
Labour and entrepreneurship

9. Labour is the human effort provided by worker during production. It includes the worker’s
physical and mental effort.

10. Entrepreneurship is the human effort provided by an entrepreneur in making production

decisions and bearing risks.

11. Wages are factor income of labour, and profit is the factor income of entrepreneurship.

Land and capital

12. Both land and capital are resources that can be used in production. They have the following
major differences:

Land Capital
• Natural resources • Man-made resources
• No human effort is • Human effort is involved.
involved.
Key features • Its creation involves zero
cost.
• Its supply cannot be
increased artificially.
Factor income Rent Interest
Fishes naturally born in an Fishes raised in ponds
Examples
ocean

13. Change in capital stock = Capital formation – Capital depreciation

• Capital formation (or investment) is the purchase or production of capital.
• Capital depreciation is the consumption or disposal of capital.

14. Capital formation > Capital depreciation → Capital accumulation (i.e., Capital stock )

15. Investment implies that present consumption is forgone for more future consumption.

NSS Exploring Economics 2 (3rd Edition) 4 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 10)