Factors of production and specialisation


Enterprise is sometimes called the most important factor of production – it is fundamental to the organisation of economic activity and put simply, is the ability to bring all the factors of production together, take a RISK in return for profit.

Factors of production

Factors of production – economists commonly distinguish 4 types of economic resources available for use in the production process, which can be remembered by the acronym ‘CELL’:

  • CAPITAL (WORKING CAPITAL OR FIXED CAPITAL – not just money!) - man-made things used to manufacture goods and create services.

  • ENTERPRISE – the ability to bring all the factors of production together, to take that risk and start that business!

  • LAND – physical resources which are used in economic activity

  • LABOUR (HUMAN CAPITAL) – human labour which is used in economic activity – skills, recruitment and training all develop this factor of production

What are the four factors of production?
Your answer should include: Capital / Enterprise / Land / Labour

Specialisation / division of labour

Specialisation - the process by which individuals, firms and economies concentrate on producing those goods and services in which they have an advantage.

Division of Labour - the process whereby the production process is broken down into a sequence of stages with workers assigned to particular stages.

Specialisation has been used to increase the efficiency of the production process; this is called division of labour. This idea was described by the grandfather of economics, Adam Smith when he described the benefits of division of labour at a pin factory.

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour…This great increase of the quantity of work which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.”

- From the Wealth of Nations by Adam Smith, 1776

Factors of production and specialisation, figure 1

Evaluate the specialisation/division of labour from an employer and employee's point of view.
Your answer should include: Productivity / Cost / Growth / Monotony / Structural / Unemployment / Independence / Risk


These advantages and disadvantages could apply to other forms of specialisation, not just division of labour. For example, the UK specialising in financial services would hopefully allow higher productivity from specialising in one area and hopefully higher economic growth & living standards. However, they would face problems if demand for financial services fell and there is a chance of unemployment if this occurred.

The same arguments hold true for firms specialising in one product area rather than diversifying their product range.