Firms and Production
Factors of Production
Factors of production are the resources used to produce goods and services.
Types of Factors:
Land
Natural resources used in production
Examples: raw materials, fish, physical land
Labour
Human effort (physical and mental)
Includes skills, qualifications, and experience
Capital
Man-made resources used to produce goods and services
Examples: machinery, tools, vehicles, factories, computers
Enterprise
Risk-takers who organise the other factors
Provide ideas and aim to make profit
Demand for Factors of Production
Derived Demand
Demand for factors of production is derived demand
This means it depends on the demand for goods and services
Example:
Universities hire lecturers only if students demand courses
Macroeconomic Demand
Demand for factors depends on overall demand in the economy
During a recession, firms demand less labour
Factors Affecting Demand for Production Factors
1. Cost of Factors
Higher cost leads to lower demand
Lower cost leads to higher demand
Examples:
Firms may replace expensive labour with machines
High interest rates increase the cost of capital
2. Availability (Quantity)
Greater availability leads to lower cost and higher demand
Limited supply leads to higher cost and lower demand
Example:
Large populations increase labour supply and demand
3. Productivity (Quality)
More productive factors are in higher demand
Skilled workers earn more due to higher productivity
Examples:
Surgeons, pilots, and lawyers are highly demanded
Some countries have better land for farming than others
Labour-Intensive and Capital-Intensive Production
Production uses factors in different proportions depending on the industry.
Labour-Intensive Production
Uses more labour than capital
Labour costs form the largest part of total costs
Examples:
Teaching
Farming
Tailoring
Sports coaching
Features:
Produces personalised products
Often expensive due to high wages
Capital-Intensive Production
Uses more capital (machines) than labour
High spending on equipment and technology
Examples:
Car manufacturing
Soft drink production
Oil extraction
Features:
Requires large investment
Acts as a barrier to entry
Can reduce costs in the long run due to efficiency