Factors of production and opportunity cost

What does it cost a farmer to grow strawberries in a field the farmer already owns? Every summer, farmers across Britain face the same choice about some of their fields. They can grow a crop, such as strawberries. Or they can mow the grass flat and rent the field out as a campsite or a festival car park. The field cannot be both, so whichever they pick, something is lost. It is tempting to count only the plants and the pickers' wages, but that leaves a cost out. So what does the choice really cost? That missing cost has a name, and the field gets its answer at the end.

Every business turns resources into the goods and services it sells, and those resources fall into four groups called the factors of production. A factor of production is a resource a business uses to produce goods or services. The four are land, labour, capital and enterprise. One business shows all four. Glenview Juices grows apples in its own orchard in Herefordshire, presses them in a small factory on the farm, and sells bottled juice to farm shops. Land means natural resources, and that includes raw materials and the site a business stands on. For Glenview, land is the orchard, and its apples are the raw material for every bottle. Labour means the people who work for a business, with their time and skills. Glenview's labour is its twelve staff, who pick, press and bottle. Now a quick one before the next factor. Glenview hires a delivery driver. Which factor is the driver? The driver counts as labour: a person employed there, paid for time and skill. Capital means man-made equipment, machinery, tools and buildings used to make other goods and services. Glenview's capital is its pressing machine, its bottling line and the factory building. In this topic, capital means equipment, not money. Money put into a business is also called capital, and that meaning belongs to the finance videos later in the course. Enterprise means the person who organises the other three factors and takes the risk. At Glenview, that is the owner, who chose to grow apples, bought the machines and hired the staff. If the juice does not sell, it is the owner who loses money. A person who takes that risk is called an entrepreneur, and what makes a good one gets its own video later on. Now the other way round. Glenview buys a forklift truck to move pallets of juice. Which factor is the forklift: land, labour, capital or enterprise? Capital. A forklift is man-made equipment that the business uses to produce and move its juice. Glenview also pumps up water from a spring under the orchard to wash its apples. A harder one, with a reason. Is that spring water land or capital, and why? Land. Nobody made the water: it is a natural resource. The pump that lifts it is capital, because people built it. Some courses list the resources a business needs as four plainer words: raw materials, machinery and equipment, workers, and a site. Each one sits under a factor. Raw materials and the site are land. Machinery and equipment are capital. Workers are labour. In an answer, name the factor first and then the example. Writing factor one, apples, gives a raw material, and leaves the factor unnamed. The full version says: land, because Glenview's orchard is a natural resource, and its apples are the raw material for every bottle, so it does not have to buy fruit in. And for capital: the pressing machine and bottling line let twelve people turn tonnes of apples into thousands of bottles a week, far more than they could press by hand. One examiner's report on a multiple-choice question says a significant number of students were unable to identify one of the four factors of production. Put plainly, those students saw a resource and could not say which factor it was. The fix is to ask four things of any resource. Is it natural, or made by people? Is it a person working, or the person organising and taking the risk?

Businesses use the four factors in very different amounts, and a hair salon and a bottled-water plant show how. Shears and Co is a hair salon, and it relies mostly on labour. Each stylist can cut only one head of hair at a time. To serve more customers, the salon must employ more stylists, which means wages are its biggest cost. Its capital is small: chairs, dryers and a sink. Fernhill Springs bottles water, and it relies mostly on capital. One automated line fills thousands of bottles an hour, with a few workers watching it. Most of Fernhill's money goes on machines, and its land matters too, because it needs its own spring. Now a why question. Why can't the salon swap its stylists for machines, the way the bottling plant has? A haircut is a personal service that a machine cannot do well. Bottling water is one small task repeated millions of times, which machines do faster and more cheaply. Size plays a part too. A large business can afford machines that a small one cannot, so what a business makes, the cost of workers against machines, and its size all shape the mix. Now switch to the wage bill. If the minimum wage rises, which business is hit harder: Shears and Co, or Fernhill Springs? Take your pick before the reveal. Shears and Co. Wages take the biggest share of the salon's spending, while Fernhill's money goes mostly on its bottling line, so the same rise hurts the salon far more.

Opportunity cost is the next best alternative given up when a choice is made. Opportunity cost is on some courses and not others, so check your specification for those two words. This part is short, and it is taught here for everyone. Every business has limited money, time and resources, so choosing one thing always means going without another. Saltmarsh Sailing School has eighteen thousand pounds to spend, and two ways to spend it. It could buy a second safety boat, which would let it run two classes at once. Or it could buy a minibus to bring in children from places with no transport. In the end, Saltmarsh chooses to buy the safety boat. Have a go at this one before I show you. What is the opportunity cost of the safety boat for Saltmarsh? The minibus, the next best alternative it gave up. With it go the extra pupils the minibus could have brought in, and the fees those pupils would have paid. Which means the real cost of the boat is more than eighteen thousand pounds. It also costs the school the bookings Saltmarsh will not win this year. Two students explain Saltmarsh's opportunity cost. The first writes: the opportunity cost is the risk that the boat might not bring in enough customers. The second writes: by choosing the boat, Saltmarsh gives up the minibus, and the fees from the extra pupils it would have brought. Which answer explains opportunity cost, and what is wrong with the other one? Take your pick, and hold on to your reason before I show you. The second one. The first describes risk, something that might go wrong with the choice Saltmarsh made. Opportunity cost is the benefit lost from the option not chosen, and Saltmarsh knows what it is at the moment it decides. One examiner's report on a question about opportunity cost says many students did not understand the term, and linked their answers to the risk of setting up a business. It records that more than a quarter of students gained no marks on that question. The same report says students who used an example to support their answer were often able to secure both marks. So the fix is to name both options from the case: what was chosen, and what was given up, and keep the word risk out of it.

Over to you for a recap, starting with a resource you have not met yet.

A bakery buys two new ovens. Which factor of production are they?

Capital, because the ovens are man-made equipment the bakery uses to produce its bread.

Now a fishing boat lands a catch of cod. Which factor is the cod itself?

The cod counts as land, a natural resource taken from the sea, while the boat that caught it is capital.

Now say it in your own words: what is opportunity cost?

Opportunity cost is the next best alternative given up when a choice is made.

Now a fresh case. A cafe owner closes on Saturday to go on a training course. What is the opportunity cost?

The Saturday takings the cafe would have earned. That is the next best alternative the owner gave up to go on the course.

Back to the farmer's field, which is land, one of the four factors of production. If the farmer grows strawberries, the field cannot be a campsite that summer. The cost of the strawberries is more than plants and wages. It includes the campsite rent the farmer gave up, and that is the opportunity cost.

If you could name what Saltmarsh gave up without looking, give this a thumbs-up, so you know you're solid on this. If not, save it. Say the meaning of opportunity cost out loud once, and it sticks.

Next in the chapter is Goods, services and types of market. Hopefully that's next in your feed, but if not, search for ScholaFly B U oh one, oh three.

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