21.

2 Demand for Factors of Production

What Factors of production are employed

The type of factors of production employed is influenced

by the type of product produced:
-car industry is capital intensive
-beauty salons labour intensive
It is also influenced by the productivity of the factors and
their cost.

combining factors of production:

a fall in price of substitutes may result in shifting factors
of production.
Example: a fall in the price of capital goods may mean
replacing labour with capital equipment.
with compliments: a fall in the price of one will increase
the employment of all factors of production. Example:
fall in the price of an aircraft will increase employment of
cabin crew and pilots.
Altering Factors of Production

If a firm wants to change the quantity of resources

employed by it, it will find it easier to do this with some
factors than others.
1. In the short run there is likely to be at least one
fixed factor of production. This means the quantity
cannot be altered quickly. Example: the size of an
office or factory. It will take time to expand
2. In the short run it might be easy to alter the
quantity of labor by changing the amount of
overtime available. Raw materials and capital
equipment can also be altered depending on the
contracts for them and availability.

Combining the Factors of Production

It is important to achieve the right combination of the

factors of production. Example: It does not make sense
to have 10 hairdryers and 2 hairdressers in a salon.
Firms combine labour, machines and land to reach the
highest level of output. Table 21.1 shows the right
combination of labour and capital for highest output.
Factors influencing demand for capital goods**

Key factor influencing Demand for capital goods:

1. A rise in the price of capital goods will cause a

contraction in their demand, whereas an increase in
the price of another factor of production , like labour,
may increase the demand for capital goods. Note:
labour is a substitute for capital. An increase in the
price of a complement however will decrease the
demand for capital goods.
2. If profit levels are high, firms will have both the
ability and incentive to buy capital goods.
3. A cut in corporation tax (tax that firms pay on their
profit) will allow firms to invest in capital goods.
4. Rising real disposable income will increase
consumption and encourage firms to invest in
capital goods for an increase in output.
5. A cut in interest rates would also tend to raise
consumption and encourage firms to expand their
capacity.
6. Confidence about future sales
7. Advances in technology will increase productivity of
capital goods.
Demand for Land

Productivity is a key factor influencing demand for land:

1. Agricultural land-the most fertile will be in highest
demand and receive the highest rent (or if by owner
has the highest value).
2. City Centres are also good targets for attracting
more customers.
3. Competition pushes up the rent at favourable sites.

KEY term (p 11) Productivity: the output per factor of

production in an hour

One natural resource experiencing an increase in

demand is water. Water is used for domestic,
agricultural, industrial and energy production purposes.
As countries become richer they have bigger
demand on water supplies.

Individual Activity 2

a. As economies and living standards develop people

have money to buy dishwashers, washing machines
and even luxury products like swimming pools.
Factors of Production and Sectors of Production

As economies develop they evolve from primary to

secondary and tertiary sectors. In certain situations
countries like India can move from primary directly to
tertiary sector. This all depends on resources available.
Different industries use different factors of production.
Example: the Chemical industry is capital intensive.

Ind Act 3
a. piece work model: people are paid based on how
much output is produced
b. i. How is output affected working from home?
Perhaps workers are distant from each other so
they might work inefficiently since they can’t
communicate. Maybe people could be more
efficient since they do not have to travel and save
time on that and are also more relaxed and less
stressed.
ii. How can smart working affect cost of production?
It can lower cost of production because the firm
saves money on energy costs and rent.
21.2 Labour Intensive or Capital Intensive

1. Labour intensive means there are more workers

than machines in an industry.
Reasons for Labour intensive sectors:
- There is a large supply of labour in a country
making labour cheap.
- Some producers are too small to take
advantage of capital equipment.
- The producer may be an artisan and offer their
customers better quality hand-made products
along with the option of custom design. This
proves to be worth more than manufactured
goods. Artisan made has higher prices than
manufactured goods: Artisan Italian shoes
-example Fiorentini Baker- made with good
materials is more expensive than manufactured
shoes (industrial made with machinery) from
Bata shoes (a brand that manufactures shoes).
- Workers can be more flexible in terms of what
they do and the size of the labour force can be
adjusted by small amount.
- Firms may switch from capital intensive to
labour intensive if the price of capital increases
and costs more than labour. NOTE: every
decision made that is economic has an
opportunity cost.
Firms who have capital-intensive production: Reasons
for this to happen:
- advances in technology tend to make goods more
affordable and more productive: machines produce
faster than humans. Because of technology,
Education for example is becoming capital intensive
with online degrees.
- Manufacturing can produce products at a lower
average cost and also be free from human error.
- capital goods do not engage in industrial action.
- machines do not get tired or sick, however they
need to be maintained: old machines may be
replaced with new ones.