Factors of Production MCQ 2

Entrepreneur and Enterprise

• An entrepreneur is an individual who takes risks and initiates business ventures to make a profit by organizing the other three factors of production.
• Enterprise is a unique factor of production that encompasses the entrepreneur's role.

Characteristics of Enterprise

• Can make negative returns, indicating potential losses.
• Returns vary in size, implying uncertainty in profits.
• Earnings are residual, meaning the entrepreneur is paid after all other factors of production have been compensated.

Role of Profits

• Encourage risk-taking by entrepreneurs, promoting innovation and growth.
• Serve as a source of revenue for business expansion and investment.
• Encourage firms to be efficient in their operations, maximizing output and minimizing waste.
• Profits are a source of government revenue, generated through taxation.

Markets

• Goods and Services Markets: Individuals demand goods and services to consume them, and these goods are demanded in their own right.

Factor Markets

• Firms and Factor Acquisition: Firms acquire factors of production to provide goods and services that individuals want.
• Derived Demand: Demand for factors of production is derived from the demand for goods and services that people want, and not for the factors' own sake.
• Definition of Derived Demand: Demand for a factor of production, not for its own sake, but for its use in producing goods and services that people want when combined with other factors of production (e.g. demand for timber to make furniture).

Key Economics Concepts

• Economic Rent: The return on any factor of production in excess of its supply price.
• Supply Price of a Factor of Production: The minimum payment necessary to bring the factor of production into use and to maintain it in that use.
• Investment: Capital formation or the production of capital goods.

Capital as a Factor of Production

• Capital refers to human-made goods used to produce other goods and services, such as factories, machinery, and computers.

Capital Deepening

• Capital deepening occurs when an increase in capital investment results in a higher ratio of capital to labor, increasing productivity.
• Example: A factory owner hires one extra worker and invests in two extra machines, leading to an increase in the capital-to-labor ratio.

Capital Widening

• Capital widening occurs when an increase in capital investment does not change the ratio of capital to labor, maintaining the same level of productivity.
• Example: A factory owner hires one extra worker and invests in one extra machine, leaving the capital-to-labor ratio unchanged.

Marginal Efficiency of Capital (MEC)

• MEC refers to the extra profit generated by employing one extra unit of capital.
• MEC is calculated as the extra revenue generated by the unit of capital minus its cost.
• Factors that influence the size of MEC include:
  • Price of the output
  • Demand for the output
  • Cost of the output
  • Rate of interest
  • Wear and tear

This quiz covers the basics of factors of production, entrepreneurship, and the role of profits. Learn about the unique characteristics of enterprise and its importance in business.