Exercises: Factors of production and economic sectors

In Grandma Nuala's bakery, all four factors of production are involved. Classify each element into natural resources, labour, physical capital, or technology and knowledge: (a) the wheat and firewood; (b) the oven and dough mixer; (c) the baker and her assistant; (d) the bakery premises; (e) the sourdough recipe and the pastry-making course taken by the assistant.

Classify these jobs into the primary, secondary, or tertiary sector, and state which one could also fit into the quaternary sector (knowledge and innovation): (a) a sheep shepherd; (b) a welder in a shipyard; (c) a delivery driver; (d) a strawberry farmer; (e) a video game programmer; (f) a carpenter who makes furniture. Explain the criterion you used.

The figure compares the share of each sector in the output of two imaginary countries: Campolia, highly agricultural, and Teknia, a developed country. One piece of data is covered. Remember that the three sectors of each country add up to $100\ \%$.

1. a) Calculate the percentage belonging to the tertiary sector in Teknia, which is the missing data on the chart.
2. b) Reason which country is more developed and explain the relationship between a country's development and the weight of its service sector.

The 'Spoke & Chain' bicycle workshop also uses the four factors of production. Classify each item as natural resources, labour, physical capital or technology and knowledge:

1. a) The lubricating oil and the steel of the parts.
2. b) The workshop's two mechanics.
3. c) The lift and the tools.
4. d) The e-bike course they took and their customer database.

Point out which of the four weighs more and more in businesses and explain why.

Many new businesses don't produce objects: a video channel, an online academy, a shop selling made-to-order designed T-shirts.

1. a) Say which sector they belong to and explain why some also fit into the quaternary sector, the one of knowledge and innovation.
2. b) Give two examples of jobs from your surroundings that didn't exist $30$ years ago and argue which sector they belong to.

Explain in your own words what productivity is — how much is produced with the same means and in the same time — with this school example: two teams make bracelets for the school market; one turns out $30$ per hour and the other, $45$, with the same materials and the same people.

1. a) Name two things that can explain the difference (organisation, practice, better tools).
2. b) Argue why it is in a country's interest for its companies to become ever more productive.

The natural resources a company uses can be renewable (they regenerate or don't run out) or exhaustible. Classify and justify:

1. a) The wood from a well-managed forest.
2. b) The oil a factory burns.
3. c) The wind in a wind farm.
4. d) The water from an aquifer that drops every year.

Explain with one of them what producing sustainably means.

Producing is not only manufacturing things: it is also providing services.

1. a) Give three examples of goods production and three of services production in your neighbourhood or village.
2. b) Explain what all those activities have in common (they combine factors to create something someone values) and why the word 'economy' covers the farmer as much as the hairdresser.

At the school fair, the sandwich stall carries out a test: if a single person handles the entire process (slicing, assembling, wrapping, and charging) it takes $10$ minutes per sandwich; if three people divide the work between them, they produce a sandwich every $3$ minutes.

1. a) Calculate how many sandwiches are produced in one hour each way.
2. b) Explain two advantages of the division of labour and one possible disadvantage (monotony, or that if one person is absent the whole production line stalls).

In Marco's grandmother's village, out of every $100$ employed residents, in $1975$ there were $55$ working in agriculture, $25$ in manufacturing, and $20$ in services. Today, there are $8$ in agriculture, $22$ in manufacturing, and $70$ in services.

1. a) Calculate the percentages for each era and summarise which sector has collapsed and which has grown.
2. b) Give two reasons explaining this change (machines do the work of many people in agriculture; as earnings increase, people spend more on services).

The bakery invests $\text{€}\ 1,200$ in a new dough mixer and $\text{€}\ 300$ in a pastry-making course for the assistant.

1. a) State which of the two investments is physical capital and which is human capital, and explain the difference.
2. b) Reason how each improves the bakery's production and why human capital is said to "travel inside the person": what happens to that investment if the assistant leaves for another bakery?

Two artisan bakeries make the same bun. Rosa's produces $400$ buns a day with $4$ workers; Mihai's, $600$ with $5$.

1. a) Calculate the productivity of each bakery (buns per worker per day) and say which is more productive.
2. b) Propose two ways for Rosa's bakery to raise its productivity without hiring anyone (better organisation, a machine, training) and one drawback of each.

Follow the bread chain: the farmer sells a kilo of wheat at $\text{€}\ 0.30$; the mill turns it into flour and sells it at $\text{€}\ 0.60$; the bakery turns it into loaves worth $\text{€}\ 2$ for the equivalent of that kilo.

1. a) Classify each link into its economic sector.
2. b) Calculate the value added of each stage (how much the value increases at each step) and explain why it increases.

The neighbourhood supermarket has installed four self-checkout tills: it has cut two cashier posts, but has hired a technician to maintain the machines and one more shelf stacker.

1. a) Analyse which factor of production gains weight and which loses it.
2. b) Explain with this case why technology destroys some jobs and creates others, and what a young cashier should do to adapt.

Your city's industrial estate has: a yoghurt factory, a removals company, a body repair shop, an engineering office that designs machines and a snail farm.

1. a) Classify each one into its sector, carefully: the farm is primary even though it is on the estate, and the engineering office fits into the quaternary sector.
2. b) Explain what distinguishes them and which one you would say needs the most human capital per worker.

Your cousin is studying an intermediate vocational qualification in welding with placements in a company (dual training).

1. a) Explain why that is an investment in human capital and who gains from it: her, the company and the country's economy.
2. b) Compare her future with that of someone who leaves school at $16$ with no qualifications: what will happen to their wage and their risk of unemployment in the long run? Give reasons for your answer.

An agricultural cooperative sells tomatoes at 0.35 €/kg to a local cannery. To produce each jar of preserves, the factory uses 1.5 kg of tomatoes and other supplies valued at 0.25 € (jar, oil, energy), selling the finished product to a wholesaler for 1.40 €. Next, a supermarket purchases the batch and sets the retail price at 2.10 € per jar. Finally, a digital home delivery platform charges a flat fee of 1.90 € to deliver the purchase to the consumer's home.

1. a) Calculate the value added generated by each of the four links in the chain and identify which sector of economic activity each agent belongs to.
2. b) Assume that an extreme drought makes the cost of tomatoes in the field 60 % more expensive. Predict how this cost increase will be transmitted along the chain: which participants have a greater capacity to pass on the price increase to the final price, and who will bear a greater loss of margin? Justify your answer.
3. c) Design a viable strategy for the agricultural cooperative to increase its share of value added without depending exclusively on the industrial cannery.

In a parliamentary debate on regional budgets, a representative states: "The primary sector barely generates 2.4 % of GDP and only employs 3.9 % of the workers in our country; maintaining incentives for this sector is an anachronism belonging to the past, and we should devote all resources to services and technology".

1. a) Rebut the representative's statement by analysing the discrepancy between the direct accounting weight of a sector and its strategic nature for an economy (food sovereignty, territorial balance, and global supply chains).
2. b) Resolve the apparent paradox: how is it possible that a sector employing fewer than 4 out of every 100 workers can produce enough food to supply the population and even export surpluses? Relate your explanation to productivity and capital intensity.
3. c) Predict two economic effects and two environmental effects that the country would suffer in the medium term if it decided to dismantle its agricultural sector to depend 100 % on foreign imports.

The food truck "The Rolling Crêpe" has a 400 € budget and experiences order backlogs during peak hours. Its only cook takes 6 minutes to complete each order: 4 minutes of passive cooking on its only crêpe maker and 2 minutes of active preparation (dispensing batter, filling, and taking payment). Management is hesitating between two alternative and mutually exclusive investments of 400 € each:

• Option A: Buy a second identical crêpe maker to be able to cook two crêpes simultaneously while preparing the rest.

• Option B: Send the cook to a high-performance culinary course that would reduce their active handling time by half (1 minute), without changing the cooking times of the machine.

1. a) Identify which specific factor of production is increased with each option (physical capital versus human capital) and explain the economic difference between the two.
2. b) Demonstrate through production capacity calculations (crêpes made per hour) which of the two options best resolves the business's current bottleneck.
3. c) If the company's plan were to hire an assistant next month to attend to the counter, which of the two initial investments would become more profitable? Justify your recommendation.

An industrial carpentry workshop is considering modernising its shop floor by purchasing an automated machining centre for 90,000 €. The machine performs the cutting of parts currently executed by two workers, whose wages and social security contributions cost the company 18,000 € per year per person. Operating and maintaining the robot will involve a cost of 6,000 € per year. In addition, the robot's greater precision will reduce wood waste by 500 € per month.

1. a) Identify which substitution of productive factors takes place and calculate the exact payback period (in years) of the investment, considering savings in labour as well as savings in raw material consumption and the technical additional cost.
2. b) Management is considering not laying off the two workers, but rather reallocating them to computer-aided design and custom artisanal finishes, which would generate an additional 1,800 € net per month from custom furniture. Evaluate numerically whether purchasing the robot is still viable with this decision and reflect on the concept of opportunity cost faced by the company.
3. c) Explain what impact the introduction of the robot will have on the labour productivity of the staff who continue working in the factory.

At the union assembly of a logistics company, a group of workers demands stopping the installation of autonomous forklifts and order-picking software, arguing: "Every new machine that enters the company destroys jobs and condemns workers to permanent unemployment".

1. a) Rebut the workers' statement based on economic history and the theory of factor complementarity: explain why technical progress usually transforms the nature of jobs instead of causing aggregate net technological unemployment.
2. b) Design an adaptation proposal for the workforce that makes the installation of the machines compatible with maintaining employment in the company, specifying what new tasks with higher value added the reallocated workers could take on.
3. c) Predict what consequences the company's viability and the jobs of the entire workforce would face if management decided to reject the technology while its direct competitors did automate their warehouses.

An Irish business group dedicated to footwear manufactures handcrafted shoes in Cork and manages its own retail stores. To reduce costs, management decides to relocate the cutting and sewing workshops to a non-EU country where labour costs are 70% lower, but keeps its R&D headquarters, graphic design, central logistics, and commercial store network within Ireland.

1. a) Justify why certain activities along the production chain can be geographically relocated with relative ease while retail services or design exhibit strong territorial inertia.
2. b) Analyse the economic impact on the region of origin: in addition to direct unemployment in the workshops, what spillover effect will auxiliary companies (tanners, packaging, technical maintenance) and the local service sector suffer?
3. c) Design two economic policies that a local or regional government could implement to retain industrial companies without resorting to wage devaluation or protectionist trade barriers.

A mountain municipality affected by rural depopulation and demographic ageing has a European fund of €300 000 to revive its economy. The town council must choose exclusively one of these three initiatives based on local resources:

• Project 1 (Forest biomass): Crushing and drying plant to produce pellets from clearing local forests. It requires heavy machinery and generates 3 year-round permanent technical jobs, reducing the risk of wildfires.

• Project 2 (Active ecotourism complex): Creation of canyoning routes, electric bicycle rentals, and a municipal hostel. It generates 11 service jobs, but 80% of them are concentrated between June and September.

• Project 3 (Cooperative cheese dairy with protected designation): Installation of a cheese dairy and ageing facility that buys milk from local farmers. It generates 5 stable year-round jobs and raises the price received by the region's herders.

1. a) Identify the predominant combination of factors of production (land/natural resources, labour, and capital) in each of the three projects.
2. b) Comparatively evaluate Project 1 and Project 2 in terms of employment stability, productivity, and vulnerability to the economic cycle.
3. c) As an economic advisor to the municipality, provide a justified recommendation on which of the three proposals will generate a greater multiplier effect and will anchor the young population more effectively in the long term.

If you analyse the most valuable companies in the world in the 1970s, most based their assets on steel mills, oil wells, or physical infrastructure. Today, the companies leading global stock markets barely own any industrial plants of their own, and their valuation is many times the book value of their facilities and machinery.

1. a) Interpret this structural shift based on the factors of production: explain how the relative weight of land and physical capital has evolved compared to human capital, technology, and intangible assets.
2. b) A manufacturing SME decides to allocate 100% of its profits to purchasing more traditional machinery identical to what it already owns, ruling out investing in software, cybersecurity, or worker training. Relying on the law of diminishing returns, predict what will happen to the company's productivity compared to a rival that combines improvements in physical capital with investment in R&D&I.
3. c) Use the concepts of opportunity cost and returns on human capital to argue economically why dropping out of academic education at age 16 for an immediate salary in an unskilled job usually results in a net economic loss over the working life cycle.