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

This guide covers 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. Both sit in topic 1, which is AS Level content. A Level candidates study it too, and the syllabus treats AS content as assumed knowledge for A Level Papers 3 and 4. Every firm, country and figure below is invented for illustration. None is a real statistic.

See the Cambridge A Level Economics hub for all topics, or tick outcomes off on the printable checklist. After this guide, use the revision notes and the practice questions. The earlier unit on scarcity, choice and methods comes first. Not sure where you stand? Try a free 10-minute diagnostic.

What this guide covers

Section	What you must be able to do
1.3.1	Define land, labour, capital and enterprise
1.3.2	Distinguish human capital from physical capital
1.3.3	Identify the reward to each factor
1.3.4	Explain division of labour and specialisation
1.3.5	Explain the entrepreneur’s role: risk and organisation of the other factors
1.4.1	Describe decision-making in market, planned and mixed economies
1.4.2	Explain how resources are allocated in each system

1.3.1 The four factors of production

Factors of production are the inputs used to produce goods and services. Economists group them into four.

Factor	Meaning	Examples
Land	All natural resources, not only ground	Farmland, forests, fish stocks, minerals, water, sunshine
Labour	The physical and mental effort of people	A welder’s work, a nurse’s work, a designer’s thinking
Capital	Man-made goods used to produce other goods	Ovens, lorries, software, factory buildings
Enterprise	Risk-taking and organising the other three	An owner who starts a firm and runs it

Three points are tested often. First, capital in economics is not money. A pile of cash is a claim on resources, not a resource that makes anything. The oven bought with that cash is capital. Second, the same item can be capital or not depending on its use: a van used to deliver a florist’s orders is capital, while the same van used for a family holiday is a consumer good. Third, land covers renewable resources such as fish stocks as well as fixed space.

Worked example 1. A bakery owner (invented) uses: a flour mill’s output (bought in), the oven, the bakers, the shop’s floor space, a loan from a bank, and her own decision to open a second branch. Classify them.

• The oven is capital. The bakers are labour.
• Floor space is land in the broad sense. A bank loan is money, so it is not itself a factor. It buys capital.
• The decision to expand, taking the risk and organising the extra inputs, is enterprise.

1.3.2 Human capital and physical capital

Physical capital is the man-made equipment and buildings used in production. Human capital is the skill, knowledge and health a worker builds through education, training and experience. Both raise what a worker can produce, and both cost something now to get a gain later.

	Physical capital	Human capital
Form	Machines, tools, buildings	Skills, qualifications, know-how, health
Ownership	Can be bought and sold	Stays with the person, cannot be sold
If the owner leaves	Stays with the firm	Leaves with the worker
Loses value through	Wear, breakdown, obsolescence	Skills going out of date, ill health

Worked example 2. A technician (invented) takes a course costing 3,000 currency units (cu). It raises her pay by 600 cu a year for 10 years.

• Total gain = 600 × 10 = 6,000 cu.
• Net gain = 6,000 − 3,000 = 3,000 cu.
• Payback = 3,000 ÷ 600 = 5 years.
• Annual return = 600 ÷ 3,000 = 20%.

If the firm paid and she left after 3 years, the firm would have gained only 3 × 600 = 1,800 cu against a cost of 3,000, a loss of 1,200 cu. This is why firms are cautious about paying for general training. Earnings she forgoes while studying would cut the true return further.

1.3.3 Rewards to the factors

Each factor earns an income for the owner.

Factor	Reward
Land	Rent
Labour	Wages (and salaries)
Capital	Interest
Enterprise	Profit

Rent, wages and interest are usually agreed in advance. Profit is what remains of revenue after the other factors are paid, so it can be large, small or negative. That uncertainty is the link to the entrepreneur’s risk.

Worked example 3. A small furniture workshop (invented) has yearly revenue of 500,000 cu. It pays wages of 210,000, rent of 40,000 and interest of 30,000, and spends 120,000 on timber and other materials.

• Profit = 500,000 − 210,000 − 40,000 − 30,000 − 120,000 = 100,000 cu.
• Shares of revenue: wages 42%, rent 8%, interest 6%, materials 24%, profit 20%. These sum to 100%.

Suppose revenue falls 10% to 450,000. Materials are 24% of revenue, so they fall to 108,000. Wages, rent and interest stay fixed.

• New profit = 450,000 − 210,000 − 40,000 − 30,000 − 108,000 = 62,000 cu.
• Change in profit = (62,000 − 100,000) ÷ 100,000 × 100 = −38%.

A 10% fall in sales cut profit by 38%, because the other rewards were already committed. The entrepreneur absorbs the shock.

1.3.4 Division of labour and specialisation

Division of labour splits production into separate tasks, each done by a different worker. Specialisation means a worker, firm, region or country concentrates on a narrow range of activities. Division of labour is the way work is organised inside a firm. Specialisation is the wider idea, and it is the reason people trade.

Worked example 4. A candle workshop (invented) has 4 workers paid 60 cu a day each. Working alone, each makes 5 candles a day. After dividing the work into melting, pouring, finishing and packing, the workshop makes 36 candles a day.

• Output before = 4 × 5 = 20 candles. Output after = 36 candles.
• Output per worker rises from 5 to 36 ÷ 4 = 9, an increase of (36 − 20) ÷ 20 × 100 = 80%.
• Labour cost per candle: before 240 ÷ 20 = 12 cu, after 240 ÷ 36 = 6.67 cu, a fall of 44.4%.

Advantages	Disadvantages
Workers get faster with repetition	Repetitive work causes boredom and lower motivation
No time lost switching tasks	Skills narrow, so workers are harder to redeploy
Each person does the task they are best at	One absence or breakdown can stall the whole line
Makes machines worthwhile, which raises output	Lower variety for consumers if output is standardised
Lower unit costs allow lower prices or higher profit	Structural unemployment if a narrow skill is no longer needed

Take the absence of the finisher. If the other three workers each still make 5 candles alone, output falls by one quarter, from 20 to 15. On the specialised line, if a cover worker can only finish 3 candles a day, the whole line is held to 3 candles, a fall of 91.7% from 36. Specialisation raises output but makes the system more fragile.

1.3.5 The entrepreneur

The entrepreneur does two jobs. Risk-taking: putting in their own money and time without knowing whether revenue will cover costs. Organisation: deciding what to produce, how, and bringing together land, labour and capital. Their reward is profit, and they can also make a loss.

Worked example 5. A café owner (invented) faces fixed costs of 3,600 cu a month. A cup of coffee sells at 3.00 cu and has a variable cost of 1.20 cu.

• Contribution per cup = 3.00 − 1.20 = 1.80 cu.
• Break-even output = 3,600 ÷ 1.80 = 2,000 cups.
• At 1,500 cups: revenue 4,500, variable costs 1,800, fixed costs 3,600. Profit = 4,500 − 1,800 − 3,600 = −900 cu.
• At 2,600 cups: revenue 7,800, variable costs 3,120. Profit = 7,800 − 3,120 − 3,600 = 1,080 cu.
• Margin of safety at 2,600 cups = (2,600 − 2,000) ÷ 2,600 = 23.1%.

The landlord, staff and lender are paid whatever the sales. The owner takes the swing from −900 to +1,080. In a large modern firm, managers and shareholders may share these two roles.

1.4 Economic systems

Every economy must answer what, how and for whom to produce. The systems differ in who decides and how resources are allocated.

	Market	Planned	Mixed
Who owns resources	Private individuals and firms	The state	Both
What is produced	Whatever consumers will pay for and firms expect to profit from	Chosen by planners	Mostly the market, plus state provision of some goods
How it is produced	Firms choose the cheapest effective method	Planners choose methods and set targets	Firms choose, within government rules
For whom	Those with income to pay	Decided by the state through rationing or allocation	Market incomes, adjusted by taxes and benefits
Signal	Prices and profit	Plans and quotas	Prices, plus government decisions

No real economy is purely one type. Think of a spectrum, with the market at one end and planning at the other.

Worked example 6: how a market reallocates. In an invented market for lamps, demand is 1,000 − 100P and supply is 200 + 100P (P in cu, quantities in units).

Price	Quantity demanded	Quantity supplied
2	800	400
3	700	500
4	600	600
5	500	700
6	400	800

Equilibrium is at a price of 4 cu and a quantity of 600. Now suppose demand rises by 120 at every price, to 1,120 − 100P. Demand and supply cross at a price of 4.60 and a quantity of 660. Price rises 15% and quantity 10%. The higher price and profit pull more resources into lamps without any central order.

Worked example 7: a planned allocation. Suppose planners fix the lamp price at 3 cu and set output at 500, matching what producers would supply at that price. Demand at 3 is 700, so the shortage is 200 units, 28.6% of the quantity demanded. With no price rise, the shortage shows up as queues, rationing or an illegal market. Planners need accurate information about preferences, and with millions of products they rarely have it.

	Strengths	Weaknesses
Market	Responds to consumer wants, profit rewards efficiency and innovation, decisions are decentralised	Ignores those without income, under-provides public goods, can be unstable or uncompetitive
Planned	Can direct resources to national priorities, can aim for equal access	Information and incentive problems, shortages and surpluses, little consumer choice
Mixed	Combines price signals with state provision and regulation	Government may mis-judge, intervention has costs, the balance is a political choice

Evaluation chain. A mixed economy is often defended because markets handle most goods well and the state corrects what they miss. The argument runs: markets reward efficiency, but some goods, such as public goods, are under-provided, so the state steps in. Whether that is better depends on how much the state does, how well it uses information, and the costs of its decisions. The judgement is about degree, not a choice of one pure system.

Common errors

• Writing that capital is money.
• Giving only risk-taking as the entrepreneur’s role and forgetting organisation.
• Mixing up division of labour (tasks within a firm) with specialisation (concentrating on what one does best).
• Describing a planned economy as having no prices or no trade at all.
• Listing system features without linking them to what, how and for whom.

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.