Cambridge International AS and A Level Economics: Factors and economic systems (9708) – Revision Notes

Quick recall for sections 1.3 (Factors of production) and 1.4 (Resource allocation in different economic systems) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. This is topic 1, AS Level content, and A Level candidates need it too as assumed knowledge for Papers 3 and 4. For full explanations and longer worked examples, read the study guide. When you are ready, try the practice questions. The course hub, printable checklist and free diagnostics show the rest. All figures here are invented for illustration.

Definitions to know word for word

Term	Definition
Land (1.3.1)	All natural resources used in production
Labour (1.3.1)	The physical and mental effort of people in production
Capital (1.3.1)	Man-made goods used to produce other goods and services
Enterprise (1.3.1, 1.3.5)	Taking risks and organising land, labour and capital
Human capital (1.3.2)	Skills, knowledge and health built up in workers
Physical capital (1.3.2)	Machines, tools and buildings used in production
Division of labour (1.3.4)	Splitting production into tasks, each done by a different worker
Specialisation (1.3.4)	Concentrating on a narrow range of activities
Market economy (1.4.1)	Private owners decide through the price mechanism
Planned economy (1.4.1)	The state owns resources and decides through a central plan
Mixed economy (1.4.1)	Market and state both allocate resources

Factors and rewards

Factor	Reward	Typical trap
Land	Rent	Not only farmland: minerals, water and fish stocks count
Labour	Wages	Includes salaries and mental effort
Capital	Interest	Capital is not money. A bank loan buys capital
Enterprise	Profit	Residual, so it can be negative

Remember the order: rent, wages, interest, profit (land, labour, capital, enterprise).

Worked reminder: income shares. Country A (invented) earns 1,000 billion cu in a year: wages 640, rent 60, interest 100, profit 200.

• Shares: wages 64%, rent 6%, interest 10%, profit 20%. Check: 64 + 6 + 10 + 20 = 100.
• Wages are 64 ÷ 20 = 3.2 times profit.

Human versus physical capital

• Both are investment: a cost now for a higher output later.
• Physical capital can be sold and stays if a worker leaves. Human capital cannot be sold and leaves with the worker.
• Both lose value over time: machines wear out, skills become outdated.
• Payback period = cost ÷ yearly gain. Annual return = yearly gain ÷ cost × 100.

Worked reminder. A course costs 2,000 cu and raises pay by 250 cu a year. Payback = 2,000 ÷ 250 = 8 years. Annual return = 250 ÷ 2,000 × 100 = 12.5%. After 3 years the gain is 750, so the course has not yet paid for itself (net −1,250).

Division of labour and specialisation

Method in steps for a calculation question:

1. Find total output before and after.
2. Divide by the number of workers for output per worker.
3. Divide the wage bill by output for labour cost per unit.
4. Work out the percentage change: (new − old) ÷ old × 100.

Worked reminder. Three farm workers each plant 10 rows a day working alone, so output is 30. With tasks divided, output is 45.

• Per worker: 45 ÷ 3 = 15. Percentage rise = (45 − 30) ÷ 30 × 100 = 50%.
• Wage bill 180 cu: labour cost per row falls from 180 ÷ 30 = 6 cu to 180 ÷ 45 = 4 cu.

Benefits	Costs
Higher output per worker	Boredom, lower motivation
Faster through repetition	Narrow skills, harder to redeploy
Machines become worthwhile	Stoppage if one stage fails
Lower unit costs	Risk of structural unemployment

Two benefits and two costs, each with a short chain of reasoning, is a typical way to build a balanced answer. State which side wins and why.

The entrepreneur (1.3.5)

Two roles: risk-taking and organising the other factors. The reward is profit, but the entrepreneur is paid after everyone else, so a fall in sales hits profit hardest.

• Break-even output = fixed costs ÷ (price − variable cost per unit).

Worked reminder. A market stall (invented) has fixed costs of 900 cu. Price is 4 cu and variable cost is 1.50 cu. Contribution = 4 − 1.50 = 2.50 cu. Break-even = 900 ÷ 2.50 = 360 units. At 500 units profit = 500 × 2.50 − 900 = 350 cu.

Economic systems

	Market	Planned	Mixed
Owner of resources	Private	State	Both
What	Consumer demand and profit	Planners’ targets	Mostly market, some state choices
How	Cheapest effective method	Plan and quotas	Firms choose within rules
For whom	Those with income	State allocation or rationing	Market income adjusted by tax and benefits
Signal	Prices	Plan	Prices and policy

Sketch of the spectrum, with the three labels placed along it:

Market --------------- Mixed --------------- Planned
(price mechanism)                         (central plan)

Real economies sit at different points on this line. None is pure.

Strengths and weaknesses in one line each

• Market: responsive and efficient, but ignores those without income and under-provides public goods.
• Planned: can focus on national priorities, but suffers from poor information and weak incentives.
• Mixed: combines price signals with correction by the state, but government can also get it wrong.

Worked reminder: a shortage under a fixed price. Planners fix a price of 5 cu. Demand is 450 units but the plan produces 350. Shortage = 450 − 350 = 100 units, which is 100 ÷ 450 × 100 = 22.2% of demand. Without a price rise the shortage appears as queues, rationing or an illegal market.

Worked reminder: how a market reallocates resources. Demand for a product rises. In an invented market the price goes from 6 cu to 7.50 cu (a 25% rise) and quantity from 400 to 440 (a 10% rise). Chain of reasoning: higher demand, shortage at the old price, price rises, profit per unit rises, firms offer more and bid for labour and materials, resources move in from less profitable uses. Nobody ordered this. The price signal did the work.

Must-know distinctions

• Capital and money: capital is a produced input, money is a claim to buy one.
• Human and physical capital: one is embodied in people, the other is owned equipment.
• Division of labour and specialisation: tasks within a process, or concentration by a person, firm or country.
• Profit and the other rewards: profit is the residual, the other three are usually agreed in advance.
• Planned and market: the allocation signal is a plan or a price. Ownership and decision-makers differ as well.
• Mixed economy and “pure” systems: the useful question is how far the state intervenes, not whether it does.

Evaluation prompts

For each system, ask: does it get information to decision-makers, does it give them an incentive to act on it, and who is left out? A market answers the first two well for goods people can pay for, but fails the third for those without income. A plan can reach everyone in principle but struggles with information and incentive. A mixed economy tries to use each where it works, but the result depends on the quality of the state’s decisions. Conclude with a judgement tied to the case in the question.

Quick self-test

1. Define enterprise.
2. State whether a haulier’s lorry and a haulier’s bank balance are capital.
3. In Country A above, what is the wage share if wages rise to 700 and total income to 1,060?
4. A training course costs 1,500 cu and adds 300 cu a year to pay. Calculate the payback period.
5. State two disadvantages of division of labour for a worker.
6. Explain why profit can be negative but wages are usually not.
7. Three bakers make 6 loaves each alone. After dividing tasks they make 27 in total. Calculate the percentage rise in output per worker.
8. Give one difference between division of labour and specialisation.
9. In a planned economy, who decides what to produce?
10. State one strength and one weakness of a mixed economy.

Answers

1. Taking risks and organising land, labour and capital.
2. The lorry is capital. The bank balance is money, so it is not capital.
3. 700 ÷ 1,060 × 100 = 66.0%.
4. 1,500 ÷ 300 = 5 years.
5. Boredom or lower motivation, and narrow skills that make redeployment harder.
6. Wages are agreed in advance and paid first. Profit is the residual left after all other costs, so it falls below zero if revenue is less than costs.
7. Before: 6 per worker (18 total). After: 27 ÷ 3 = 9 per worker. Rise = (9 − 6) ÷ 6 × 100 = 50%.
8. Division of labour splits tasks within production. Specialisation is concentration on a narrow range by a worker, firm, region or country.
9. The state, through central planners.
10. Strength: uses price signals while the state can correct under-provision of public goods. Weakness: government intervention can be mistimed or costly.

Where marks are usually lost

• Saying capital is money or equipment bought “with money” without separating the two.
• Giving only risk or only organisation for the entrepreneur.
• Listing advantages of division of labour without explaining why output rises.
• Writing “wage” as the reward to capital, or “interest” as the reward to land.
• Omitting working in percentage questions, then losing the method when the arithmetic slips.
• Describing a planned economy as having no prices without stating who sets them.
• Treating the market or the plan as always efficient, with no judgement about degree.
• Forgetting that human capital leaves with the worker.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International Education). Sections 1.3.1 to 1.3.5 and 1.4.1 to 1.4.2.